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Fed opts for 1st rate hike under new chairman Powell, expects higher GDP in 2018


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Fed opts for 1st rate hike under new chairman Powell, expects higher GDP in 2018

The Federal Reserve has raised its benchmark interest rate and signaled that it is still penciling in three rate hikes in 2018, even as Fed officials upgrade their projections for economic growth.

The federal funds rate will now be at a target range of 1.5% to 1.75%, the Federal Open Market Committee said in a March 21 statement. The 25-basis-point increase, the first under Chairman Jerome Powell, was widely anticipated as the Fed continues gradually lifting the benchmark rate.

Some also expected that Fed officials might signal plans to hike rates four times in 2018, though the FOMC's projections did not take that step. The projections do show that Fed officials now expect GDP to grow by 2.7% in 2018, up from the 2.5% that they had expected as of December 2017.

At the moment, the median Fed official still favors two more rate hikes this year, the projections show. Still, six FOMC participants saw four rate hikes as likely appropriate in 2018, compared to three with the same view in the December projections.

The projections also showed that FOMC officials expect more rate hikes in 2019 than they did as of December.

"The economic outlook has strengthened in recent months," the statement said. "The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong."

Powell helped reinforce expectations of a March rate hike when he said his "personal outlook for the economy has strengthened" in testimony to the U.S. House of Representatives last month. Other Fed officials have sounded more hawkish in recent weeks, citing tax cuts as one reason why they foresee the economy growing at a quicker pace.

Inflation, though, continues to run below the Fed's 2% goal. The central bank's preferred measure of inflation — personal consumption expenditures excluding food and energy — has been stuck at 1.5% in the past three readings.

The FOMC's post-meeting statement said inflation "is expected to move up in coming months" and stabilize around its 2% goal over the medium term.