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As expected by financial markets and pretty much all economists, the Federal Reserve kept its key interest rates unchanged today and stayed on course for higher interest rates in the coming months. There were no really major changes in the statement it issued after its two-day rate setting meeting. However, there was an acknowledgment that inflation has been moving higher.
The key development since the Fed's last meeting in March has been on the inflation front. Now Fed policymakers pretty much expected inflation to move back to its target because there were some one-off factors that held inflation back last year, which are now no longer in the picture. And that meant that core inflation and headline inflation, at least the preferred measures that the Fed follows, are now more or less on its 2% target. And the main changes to the statement that the Fed put out today reflected that move in inflation back to target. The underlying tone was that the Fed is getting a bit more confident about inflation.
It did counter that and try and dampen any notion that it's getting hawkish by twice pointing out that its inflation target is a symmetrical inflation target. Now when it says that, the Fed is basically telling the markets, we are as comfortable or uncomfortable with inflation going above a target as below a target. Just because it was a minor overshoot in inflation doesn't mean we're going to suddenly clamp down on the economy. So it's a way of saying they're not going to overreact if inflation does start to edge slightly higher than 2% target.
The real question for 2018 is whether they'll be four in total upward moves rather than three, which is the Fed's most recent forecast in March. The other big question is really how high the Fed thinks it will need to go when it comes to rates in the longer term. Its forecast released in March suggested it could go comfortably above 3% by 2020. It's - that's a fair way out, and it's something that will really only become clear over many meetings to come.