Change in the Call: Adding a Fourth Hike in 2019

The story that we have been telling this year is playing out: First, we are seeing firmer inflation readings,  increasing confidence that inflation will get to 2% as early as this year, and increasing the likelihood that inflation will overshoot 2% following this year. Second, we are seeing stronger momentum in economic activity. But now we must incorporate the recent spending bill, which provides much more stimulus than we’d anticipated and pushes the forecast in the direction of stronger growth and a lower unemployment rate.  We remain comfortable with projecting four rate hikes in 2018, and the risks to that call have become more balanced after Congress passed this spending bill, which is much bigger than we’d assumed (previously we saw the probability of three hikes as far greater than the probability of five). But the spending bill is a source of additional stimulus to an economy already growing above potential, and monetary policy will be tighter in response. We anticipate an additional rate hike, which we expect will occur in 2019. That leaves us with four hikes in 2018 (unchanged), four hikes in 2019 (one more than previously), and one hike in 2020  (unchanged). On a separate note, we’ll elaborate on how the size of the fiscal impulse affected the projected path of the fund’s rate. 

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