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Fed Raises Interest Rates But Forecasts Fewer Rate Hikes Next Year

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In a widely expected move, the Federal Reserve announced its decision to raise interest rates by a quarter point on Wednesday.

The central bank said its Federal Open Market Committee decided to raise the target range for the federal funds rate by 25 basis points to 2.25 percent to 2.50 percent.

The Fed's closely watched accompanying statement noted the labor market has continued to strengthen and that economic activity has been rising at a strong rate.

Annual rates of both overall inflation and core inflation were also said to remain near the Fed's 2 percent target, with indicators of longer-term inflation expectations also little changed.

The Fed also reiterated that further gradual increases in interest rates would be consistent with the FOMC's mandate to foster maximum employment and price stability.

However, eagle-eyed Fed watchers will notice the inclusion of the word "some" in the statement regarding further gradual rate increases.

In another indication the Fed plans to raise rates less than previously anticipated, the central bank's projections point to two rate hikes in 2019 compared to the previous forecast for three.

The Fed's median projection for the federal funds rate in 2019 was reduced to 2.9 percent from the 3.1 percent expected in September.

The median forecasts for rates in both 2020 and 2021 were also lowered to 3.1 percent from 3.4 percent, while the projection for longer run rates was downwardly revised to 2.8 percent from 3.0 percent.

The central bank also lowered its forecasts for real GDP growth in 2018 and 2019 to 3.0 percent and 2.3 percent, respectively. The Fed previously projected 3.1 percent growth in 2018 and 2.5 percent growth in 2019.

While once again calling risks to the economic outlook roughly balanced, the Fed added that it will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

Following today's rate increase, Fed Chairman Jerome Powell said rates are closer to what the central bank views as a neutral level that is neither restrictive nor stimulative.

"Where we are right now is the lower end of neutral," Powell said in his post-meeting press conference. "There are implications for that."

Paul Ashworth, Chief U.S. Economist at Capital Economics, said today's widely anticipated rate hike was tempered by the slight downward revision to Fed officials' projections for additional rate increases in 2019 and beyond.

"Still, with the vote unanimous and the median rate projection for end-2019 revised down by only 20bp, this is hardly the 'dovish hike' that some were anticipating," Ashworth said.

"On balance, we still expect the Fed to hike twice in the first half of next year before a slowdown in GDP growth to below potential forces it to the side lines," he added. "We then expect the Fed to reverse course and cut rates by 75bp in 2020.

Ahead of the announcement, President Donald Trump had been urging the Fed to refrain from its gradual pace of raising rates.

"Don't let the market become any more illiquid than it already is," Trump told the Fed in a post on Twitter on Tuesday. "Stop with the 50 B's. Feel the market, don't just go by meaningless numbers. Good luck!"

Despite the president's frequent attacks on the Fed, Powell told reporters political considerations play "no role whatsoever" in the central bank's discussions or decisions about monetary policy.

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