Fed hikes interest rates, signals strong support for another increase in December

The Federal Reserve on Wednesday raised interest rates for the third time this year and signaled it was prepared to increase again in December, as it also altered language that could mean a slowing in the pace of future increases. After the end of a two-day meeting, the Fed said in a statement that it has increased its target for its benchmark lending rates to a range between 2% to 2.25%. Rates are now at their highest level since shortly after the bankruptcy of Lehman Brothers in the fall of 2008. The decision was unanimous.

At the same time officials removed key language that policy was “accommodative.” This was seen as giving them more flexibility on the pace of rate hikes next year. U.S. stocks SPX, +0.47% extended gains right after the decision. The yield curve flattened. With growth in the second quarter at an annualized rate of more than 4%, core inflation near the 2% target, and an ever-tightening labor market, the Fed has been trying to get short-term rates up to a “neutral” level that neither supports nor restricts growth. The Fed’s dot plot showed that 12 officials now expect another quarter-point rate hike in December, up from eight officials in the last projections in June. Only four officials now pencil in a pause in December.

The bond market has been starting to believe that more rate hikes are coming. Yield on the 10-year Treasury note TMUBMUSD10Y, -0.51% have risen slowly but steadily over the past month. The Fed also released a new economic forecast that showed the unemployment rate would start to rise in 2021 as its restrictive policy started to bite. In the Fed’s forecast, economy growth will gradually decline over the next three years from a 3.1% annual rate this year to a 1.8% rate in 2020 and 2021.