At today’s meeting of the Federal Reserve’s Open Market committee, the central bank kept its benchmark short-term interest rate unchanged at 1% to 1.25%, and announced that it would implement its plan to shrink its $4.5 trillion balance sheet by $10 billion a month beginning in October. The balance-sheet reduction would follow the framework released in June: The Fed will let $6 billion in Treasuries and $4 billion in mortgage-backed securities per month mature without buying new assets to replace them, and that amount would rise every three months until the amounts reach $30 billion and $20 billion per month, respectively.
All of that was expected by the financial markets.
But there were some mild surprises in the Fed’s outlook for 2018. The Fed said it thought growth would be strong enough to back up another interest rate increase by the end of 2017 (at the December meeting) and that it was looking at three more interest rate increases in 2018. That would be enough to push the Fed’s short-term benchmark interest rate above 2%.
Financial markets had been, by and large, hoping to hear the Fed back off on interest rate increases for 2018 on lower forecasts for growth and inflation. The central bank disappointed on those fronts today.
In its Dot Plot, which tracks forecasts at the Fed about future growth, inflation, and interest rates the bank left its view for 2018 unchanged with a projected end of the year interest rate of 2.125%. For 2019, the Fed was a little less aggressive in its forecasts than expected: Two more additional interest rate increases would leave rates at 2.7% at the end of 2019, down from the June forecasts for 2.938% at the end of 2019.