Federal Reserve Hikes Rate To 1.25-1.50%, Outlook Unchanged

On Wednesday, the Federal Reserve announced the third rate hike of 2017 at the Federal Open Market Committee (FOMC) meeting. The Fed was tempted by the strengthening economy as well as impressive labor market gains.

The benchmark federal funds rate has been hiked to 1.25-1.50%, from 1.00-1.25% raised in June 2017. Notably, this is the fifth raise in interest rates since the 2008 financial crisis, which led the Fed to lower rates to near zero.

"The labor market has continued to strengthen and ... economic activity has been rising at a solid rate," the Federal Open Market Committee noted in a statement following its two-day meeting.

Though policymakers have increased their expectations for economic growth in 2018, on the Trump administration’s proposed tax cuts, they continued with their projections of three hikes in 2018 and two hikes in 2019.

“My colleagues and I are in line with the general expectation among most economists,” said Janet L. Yellen, the Fed’s chairwoman. She stated they expected the bill to provide “a modest lift.” “We continue to think that a gradual path of rate increases remains appropriate even with almost all participants factoring in their assessment of the tax policy,” Yellen further added.

The central bank projects economic growth at the rate of 2.5% in 2018, up from the previous expectation of 2.1%. Further, the growth rate is anticipated to be 2.1% in 2019 — moderately higher than the previous forecast of 2%.

Further, based on the updated economic projections, Fed expects inflation to be at 1.7%, below its target of 2%. The unemployment rate is predicted to fall to 4.1% this year, down from the prior forecast of 4.3%. Also, it is estimated to decline to 3.9% in 2018, down from the previous projection of 4.1%.

“Changes in tax policy will likely provide some lift to economic activity in coming years,” Yellen said, adding that “the magnitude and timing of the macroeconomic effects of any tax package remain uncertain.”

With decent economic growth and recent strong gains in the labor market, rate hike is an added advantage. However, there are temporary concerns over the weak inflation.

In addition to the above, reiteration of number of rate hikes in 2018 and 2019 by the Fed officials disappointed the investors who were expecting more hikes on the likely strengthening of economic activity due to tax policy changes. Notably, Wall Street biggies including U.S. Bancorp (NYSE:USB) , Wells Fargo & Company (NYSE:WFC) , Citigroup Inc. (NYSE:C) and Bank of America Corporation (NYSE:BAC) (NYSE:C) edged down more than 1% following the rate hike announcement.

Notably, U.S. Bancorp, BofA and Citigroup carry a Zacks Rank #3 (Hold), while Wells Fargo carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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