Fed raises interest rates, locks in December increase, signals 3 moves in 2019

No surprise on a September interest rate increase from the Federal Reserve today–but some very aggressive signals on policy into 2019.

The 25 basis point increase today raised the Fed Funds rate to a target of 2% to 2.25%. The economy remains solid;  job growth has been strong; and inflation is near the central bank’s 2% target rate, the Federal Reserve said in its post-meeting statement. That pretty much mirrors what the Fed said in its last statement. This was the Federal Reserve’s eighth interest rate increase since 2015 and has moved the Fed Funds rate to its highest level since October 2008, just after the collapse of Lehman Brothers. The vote was 9-0.

The Fed’s updated dot plot–which charts expectations on policy moves by Fed officials–strengthened the odds for another interest rate increase in December. 12 of 16 officials now expect a December increase. That’s up from eight in the June projection.

The dot plot also showed the Federal Reserve anticipating three interest rate increases in 2019. That’s unchanged from the June projection.

The Fed raised its growth estimates for the U.S. economy for next year but predicted that economic growth will slow to 1.8% by 2021. The Fed, in other words, remains skeptical to claims by the Trump administration that the economy has moved to a sustained 3% growth rate.

Ahead of the meeting the bond market wasn’t convinced that the Fed would wind up raising interest rates three times in 2019, instead holding to a belief in just two rate moves. It will be interesting to see if the market starts to converge with Fed projections in coming days.

At a press conference after the meeting–which covered topics from the tariff war with China to Supreme court nominations–President Donald Trump voiced his disagreement with the Fed’s decision to raise interest rates. “Unfortunately they just raised interest rates. I am not happy about that,” the President said. “I’m worried about the fact that they seem to like raising interest rates.”

The Fed’s move widens the gap between U.S. interest rates and those at the European Central Bank and the Bank of Japan. The European Central Bank has said it will maintain its policy rate of a negative 0.4% at least through next summer;  the Bank of Japan is set to stick with its current benchmark rates until 2020.

Today the Standard & Poor’s 500 stock index fell 0.3% with the majority of losses coming in the final 20 minutes of trading.