Econ­o­mists in new sur­vey see Fed­eral Re­serve on au­topi­lot

Over­all, econ­o­mists sur­veyed see the fed­eral-funds rate end­ing the year at 2.33%

The Niagara Falls Review - - Business - DAVID HAR­RI­SON The Wall Street Journal

Econ­o­mists sur­veyed by The Wall Street Journal see the Fed­eral Re­serve mov­ing in a reg­u­lar pat­tern of quar­terly in­ter­est-rate in­creases to keep the econ­omy on a steady foot­ing.

With the la­bor mar­ket fir­ing on all cylin­ders and with in­fla­tion at the Fed’s 2% tar­get, the cen­tral bank will put pol­icy on au­topi­lot un­less some­thing—per­haps an es­ca­lat­ing trade con­fronta­tion— comes along to dis­rupt its plans, the econ­o­mists said.

Just about ev­ery econ­o­mist sur­veyed said the next in­crease in the Fed’s bench­mark fed­er­al­funds rate would come at the Sept. 25-26 meet­ing and 84% pre­dicted the one af­ter that would be at the Dec. 18-19 meet­ing.

Over­all, econ­o­mists see the rate end­ing the year at 2.33%, up from the cur­rent range of 1.75% to 2%. That is the equiv­a­lent to four quar­ter-per­cent­age-point in­ter­est-rate in­creases in 2018. By the end of 2019, the econ­o­mists see the fed­eral-funds rate set­tling at 3%, which would rep­re­sent two to three rate in­creases next year.

“The Fed seems in­tent on grad­u­ally rais­ing rates over the next two years,” said Gre­gory Daco, an econ­o­mist at Ox­ford Eco­nomics.

The econ­o­mists’ view largely matches the rate path Fed of­fi­cials pro­jected at their June meet­ing. Af­ter rais­ing rates in March and June, of­fi­cials pen­ciled in two more in­creases this year and three next year, in­tended to keep in­fla­tion in check and pre­vent the econ­omy from over­heat­ing.

Of­fi­cials also have ex­pressed a greater de­gree of con­sen­sus in their pub­lic pro­nounce­ments. Some who had pre­vi­ously called for a slower pace of rate in­creases, such as Fed gov­er­nor Lael Brainard and Chicago Fed Pres­i­dent Charles Evans, now say the strong econ­omy will re­quire more rate in­creases than they an­tic­i­pated ear­lier this year.

“The econ­omy seems so strong it seems nat­u­ral that busi­nesses and con­sumers can live with”

higher bor­row­ing costs, Mr. Evans said in an in­ter­view this week.

There are risks, how­ever. The econ­o­mists pointed to the Trump ad­min­is­tra­tion’s un­pre­dictable trade pol­icy as the main threat to the econ­omy.

“Tar­iffs and es­ca­lat­ing trade ten­sions are a wild card for the out­look,” said Diane Swonk,

chief econ­o­mist at Grant Thornton. “We all keep hop­ing they will go away. They haven’t.”

The Trump ad­min­is­tra­tion on Tues­day an­nounced a third round of tar­iffs on $200 bil­lion (U.S.) of Chi­nese prod­ucts, ramp­ing up a trade dis­pute and prompt­ing re­tal­i­a­tion from Bei­jing.

The ad­min­is­tra­tion has also im­posed tar­iffs on im­ported steel and alu­minum from the Euro­pean Union, Canada and Mex­ico, lead­ing those coun­tries to set their own tar­iffs on U.S. ex­ports. Those steps could un­set­tle global mar­kets and cause busi­nesses to pull back on in­vest­ment, which could lead to a slow­down in growth. An es­ca­la­tion in trade ten­sions could also boost the price of U.S. im­ports which could push up in­fla­tion fur­ther.

For now, the econ­o­mists still see the risk of a trade-in­duced re­ces­sion as re­mote. On av­er­age, econ­o­mists only see an 18% chance of the U.S. econ­omy tum­bling into a re­ces­sion within the next year.

But Bernard Bau­mohl, chief global econ­o­mist at The Eco­nomic Out­look Group, warned it can’t be ruled out com­pletely.

“While the econ­omy has enough mo­men­tum to grow the rest of the year, the risks of a down­turn in 2019 and 2020 are climb­ing,” he said.

The Wall Street Journal sur­veyed 63 econ­o­mists but not ev­ery one an­swered ev­ery ques­tion.

ALEX KRAUS/BLOOMBERG

Econ­o­mists sur­veyed by the Wall Street Journal see the risk of a trade-in­duced re­ces­sion as re­mote de­spite tar­iffs on steel.

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