• March 20-21 2018 FOMC Meeting
• In a Nutshell: “The economic outlook has strengthened in recent months.”
• Decision: Fed funds rate target range increased to 1.50% to 1.75%.

In his first meeting a Chair of the Federal Reserve Jerome Powell took control. Not only did the FOMC raise the funds rate target, which was totally expected, it sent some pretty clear signals about future rate hikes. At least I believe the messages were clear. Most importantly, the Committee indicated there could be three if not four hikes this year and next and the rate at which the funds rate could top out at is also higher than previously projected.

First, and foremost, the Committee inserted into the statement the sentence, “The economic outlook has strengthened in recent months”. When the statement says something new, it should be viewed as important. The Committee thinks growth is really good, not just getting better. Yes, there was some downgrading of the current conditions, indicating that the “growth rates of household spending and business fixed investment have moderated rom their strong fourth-quarter readings.” Some may view that as a warning sign about the economy, but it is only a reflection of the simple fact that first quarter growth looks like it will come in below what we had in the previous two quarters. The Fed operates in the real world and that comment only reflects reality.

The view that the economy is strong is critical as it reflects the very changed “dot plot” and chart of member forecasts. They now point to at least three rate hikes this year and if only one member switched from three to four, we would be looking for four hikes. The Fed is almost evenly split between raising rates three or four times. I have been on the four side for many months, so I will maintain my forecast that many. Also, the number of hikes expected for 2019 has moved up from two to three. In time, it will probably reflect my expectation of four increases again next year.

The forecast table indicated that growth over the next three years should be greater than expected in December, the unemployment rate will be lower and most importantly, the funds rate is now projected to top out at 3.4%, not 3.1%. The top of the longer-term range was also pushed upward sharply, from 3.5% from 3.0%. Despite the stronger growth, lower unemployment rate and higher interest rate forecast, the inflation projection was the same. That provides some wiggle room because the members are somewhat confused about what is driving inflation.

So, what does this all mean? My take is this: The Fed is going to raise rates at least 1½ but more likely 1¾ percentage points between now and the end of 2019. That means possibly four moves this year and next. And it could raise rates again in 2020. I don’t think a lot of investors have that factored into their planning. But it makes sense as the tax cuts should hype growth in a tight labor market environment and it will be the Fed’s job to make sure that faster expansion doesn’t get transmitted into too strong inflation. Rate hikes and quantitative tightening will likely continue unabated for the next two years.

(The next FOMC meeting is May 1-2, 2018.)

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.