Updated Dec. 14, 2016 4:06 p.m. ET
The Federal Reserve isn’t going to wait around for Donald Trump.
The central bank on Wednesday raised its target range on overnight interest rates by a quarter point to a range of 0.5% to 0.75% and signaled that it expects to raise it further in the months ahead. Policy makers’ updated projections now imply there will be three rate increases of a quarter point each in 2017, up from September’s projection of two increases.
The hawkish tilt got investors’ attention: The Dow Jones Industrial Average, which earlier in the day looked as if it might clear 20000, turned negative following the Fed’s announcement. Given how sensitive the economy might be to rate rises, that might have been an appropriate response.
What the Fed will actually do next year will depend on how the economy fares, and how the economy fares may depend a lot on how big a tax-cut and fiscal spending boom President-elect Donald Trump and Congress put into place next year. There is a lot of uncertainty surrounding all of those things, so there is an argument that the Fed ought to play it cautiously until it gets a little more clarity.
But even without Washington’s help, the economy looks like it is getting warmer. The unemployment rate is at a nine-year low of 4.6%, growth appears to have firmed and price pressures seem to be picking up. So even if the Fed ignores Mr. Trump’s plans, it would make sense for it to adopt a slightly more hawkish stance.
Entirely ignoring Mr. Trump would be a hard trick for the Fed, however. In her news conference Wednesday, Fed Chairwoman Janet Yellen did allow that the possibility of fiscal policy giving the economy a push did factor into some policy makers’ projections. A scenario in which the Fed must suddenly raise rates in response to inflationary pressures introduced as a result of a large tax-cut and spending package probably isn’t something the central bank wants to see. At the very least, the idea of delaying rate increases to draw more people into the labor force probably isn’t as appealing as it was when the Fed met before Election Day.
At the same time, the Fed also has less headroom on rates than it used to. Policy makers left the midpoint of their longer-run federal-funds target rate projections—the overnight rate they think is consistent with an economy at full employment and inflation hitting its 2% target—at 3%. That compares with 4% at the start of 2014. One implication of that is each quarter-point increase in overnight rates will pack more of a punch than it used to.
“Don’t fight the Fed” is an adage that investors might need to relearn.