Fed may ‘turn’ more hawkish
Cbank to raise rates this week
WASHINGTON, Sept 23, (AFP): Under the cloud of an escalating trade war, the US Federal Reserve this week will raise the benchmark lending rate for the third time this year, moving to prevent inflation from mounting too quickly as the world’s largest economy continues brisk growth.
The Fed’s two-day policy meeting will begin Tuesday – barely 24 hours after President Donald Trump is due to target another $200 billion in Chinese imports with punitive tariffs, bringing the total to over $250 billion.
That will deliver a blow to trade relations between the world’s top two economies and cast a pall of uncertainty over the global economic outlook.
But analysts say, so far at least, that the trade war has yet to make much of a dent in the US economic data that central bankers watch so closely.
Since the Fed’s last meeting, job creation and GDP numbers have shown robust health, wages have risen and inflation has firmed, while measures of industrial activity and the housing market are among the few that have softened.
Among those sounding a warning, the International Monetary Fund has warned the escalating trade war could come at “significant economic cost,” hitting US and China’s growth.
But with the US economy robust, the Fed has repeatedly signaled it expects to continue “gradual” increases in the rate used to set everything from car loans to mortgages. By year end, the central bank is likely to have raised the key interest rate a total of four times and three more increases are expected in 2019.
This will mean the target rate will reach a range of 3.0-3.25 percent by December 2019 – a notch above what policymakers currently view as “neutral,” meaning it neither stimulates nor restrains the economy, which is the goal. But will the Fed stop there? If there are signs inflation is accelerating, the Fed would certainly move to tighten policy to dampen prices. But even staying at neutral may be a moving target.
Fed Governor Lael Brainard, an intellectual center of gravity at the central bank who had long called for the Fed to proceed slowly with rate hikes, described an important change in her thinking in a speech earlier this month.
“With government stimulus in the pipeline providing tailwinds to demand over the next two years, it appears reasonable to expect the shorter-run neutral rate to rise somewhat,” Brainard said.
This suggests she may not want the Fed to stop at 3.0-3.25 percent, but continue nudging the rate higher.