The Federal Reserve made no changes to monetary policy today and it barely changed the language of its statement.  That makes sense to us because we haven't changed our outlook for monetary policy or the economy, either. 

The investor consensus, the Fed, and our view are all agreed that the Fed will raise twice more this year, most likely in September and again in December, 25 basis points (bps) each time.  However, there's a notable discrepancy about 2019. 
 
The investor consensus, as represented by the futures market in federal funds, expects one or two rate hikes in 2019 (25 bps each).  The Fed says three rate hikes is the most likely outcome.  By contrast, we think real GDP growth and inflation will both exceed the Fed's expectations while unemployment falls below Fed projections.  As a result, we think the Fed will raise rates four times next year, just like this year.        

The most significant change in today's statement was that the Fed described recent economic activity as rising at a "strong" rate, rather than a "solid" rate, like it said in its statement back in June.  That's consistent with the Fed gradually realizing the economy is better than it thinks and moving toward our view of more aggressive rate hikes.  As this continues, look for long-term interest rates to keep moving up, as well. 

Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist