The Federal Reserve on Wednesday raised interest rates for the first time this year and signaled it will act more aggressively to head off inflation, potentially threatening President Donald Trump’s hopes for faster economic growth.
Fed officials are now essentially split on the question of whether to hike interest rates a total of three times or four this year — a response, in part, to recent tax cuts and increased spending by Congress, which the central bank fears could lead prices to spike.
The Fed’s interest rate-setting body, the Federal Open Market Committee, said in a statement that it expects inflation to reach its 2 percent target “in the coming months.” The committee unanimously agreed to raise its main borrowing rate to between 1.5 percent and 1.75 percent, the first action taken under new Chairman Jerome Powell.
There is some good news for Trump. Fed officials upgraded their forecast for economic growth this year and next, projecting a 2.7 percent increase in GDP in 2018 and a 2.4 percent increase in 2019. But over the longer term, the central bank still expects growth to hover at or below 2 percent.
Trump is aiming for annual GDP growth of 3 percent.
“The economic outlook has strengthened in recent months,” the FOMC said in its statement.
Fed officials also projected unemployment would fall to 3.8 percent this year and 3.6 percent next year, and then balance out at around 4.5 percent over the longer term. This would be the first time that the unemployment rate has dipped below 4 percent since the 1960s.
Although the Fed’s median projection is still for three rate hikes this year, four hikes are a very real possibility, since some of the central bank officials who are most vocal about waiting for further increases — such as Minneapolis Fed President Neel Kashkari and Chicago Fed President Charles Evans — are not voting members this year.
The Fed is also projecting three rather than two hikes for 2019.