Gold rises after Fed plans fewer than expected rate hikes in 2018

By Renita D. Young and Zandi Shabalala

NEW YORK/LONDON (Reuters) - Gold rose more than 1 percent from a three-week low on Wednesday after the U.S. Federal Reserve increased interest rates and forecast at least two more hikes for 2018, falling short of the three more increases many expected.

The U.S. dollar also hit its session low after the Fed decision.

In its first policy meeting under new Fed chief Jerome Powell, the U.S. central bank said inflation should move higher amid a stronger economy after years below its 2 percent target.

"The economic outlook has strengthened in recent months," the Fed said in a statement at the end of a two-day meeting in which it lifted its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.50 percent to 1.75 percent.

Inflation "is expected to move up in coming months and stabilize" around the Fed's target, it said.

Spot gold rose 1.8 percent at $1,334.75 per ounce by 3:34 p.m. EST (1934 GMT), earlier hitting $1,335.47, its highest since March 7. Bullion had dropped as low as $1,306.91 in the previous session.

U.S. gold futures for April delivery settled up $9.60, or 0.7 percent, at $1,321.50 per ounce.

The dollar index , slipped against a basket of currencies. A weaker greenback makes dollar-denominated assets such as gold cheaper for holders of other currencies.[USD/]

In years past, leading up to Fed rate hikes, gold prices have tended to rise. But after rate hikes, gold prices tended to drop since rising interest rates typically make non-yielding bullion less attractive.

However, gold prices rose Wednesday because the dot plot showed fewer rate hikes than market participants anticipated, said Trey Reik, senior portfolio manager at Sprott Asset Management.

"For 2018 we didn't get what a lot of people whispered -four rate hikes - but that was balanced by the rate hikes in 2019 and 2020," he said.

He was referring to the fact that the Fed said it also intended to raise rates in 2019 and 2020.

Gold is expected to rise to the $1,350-$1,400 level, according to George Milling-Stanley, head of gold strategy at State Street Global Advisors. "The real gains will come in the next month," he said.

Analysts said the possibility of an escalation in geopolitical tensions could cushion gold, as a possible global trade war looms.

Among other precious metals, silver added 2.8 percent at $16.63 an ounce, surpassing a six-day high.

Platinum increased 1.9 percent at $958.40 per ounce and palladium rose 1.5 percent at $993 per ounce.

(Additional reporting by Eileen Soreng and Nallur Sethuraman in Bengaluru; Editing by Rosalba O'Brien and Tom Brown)