The Borneo Post

Fed likely to raise rates, possibly end ‘accommodat­ive’ policy era

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WASHINGTON: With the Federal Reserve widely expected to raise interest rates yesterday, financial markets are focused on whether signs of an accelerati­on in US economic growth will prompt the central bank to ramp up the pace of monetary policy tightening.

This week’s two- day policy meeting could mark the formal end of the ‘accommodat­ive’ level of rates the Fed has used to support the American economy since the onset of the 2007-2009 recession.

The Fed’s current policy statement has included that descriptio­n of loose policy as a staple element in recent years, though officials recently have described it as out of date and likely to be removed, either this week or in the near future.

The probabilit­y the Fed will raise its benchmark overnight lending rate by a quarter of a percentage point on Wednesday, in what would be its third hike this year, is nearly 95 per cent, based on an analysis of fed fund futures contracts by CME Group.

The larger question is whether the Fed reshapes its monetary policy outlook for the next few years to factor in stronger GDP growth or whether concerns about a possible global trade war or economic slowdown cause it to stick close to its current view.

Gross domestic product grew at a 4.2 per cent annualised rate in the second quarter, according to US Commerce Department data released last month. The economy grew at a 2.2 per cent pace in the first quarter.

Some analysts are expecting a more aggressive tilt, whether it comes in the policy statement due to be released at 2 pm EDT (1800 GMT), the accompanyi­ng economic and interest rate projection­s from policymake­rs, or Fed Chairman Jerome Powell’s press conference after the conclusion of the meeting.

“Financial markets should prepare for a more hawkish tone,” Natixis economists Joseph Lavorgna and Thomas Julien wrote ahead of the meeting.

“Another quarter of 4 per cent real GDP growth coupled with faster wage gains will likely cause policymake­rs to err on the side of aggressive­ness at some point ... Investors may soon have to contend with the fact that the Fed is going to press harder to dampen ebullient economic activity.” In its last round of economic projection­s in June, the Fed forecast the economy would grow 2.8 per cent this year, a figure several central bank officials have since publicly notched higher.

The unemployme­nt rate, currently 3.9 per cent, is at a level considered beyond what can be sustained without putting upward pressure on wages and inflation, and consumer confidence is strong, having hit an 18-year high in September.

In addition, equity markets have largely sloughed off the risk that the economy will be derailed by a global trade war.

Some Fed policymake­rs have said they feel a recent jump in US wages is just the first of more to come. Powell, who took over as head of the Fed earlier this year, has emphasised managing risks in a way that indicates he is more on guard about a possible jump in inflation than in trying to push unemployme­nt rates ever lower.

Investment bank Goldman Sachs predicts the Fed will raise rates four times in 2019, faster than the three hikes suggested by policymake­rs in their projection­s in June or the two to three increases foreseen by investors.

The Fed’s benchmark overnight lending rate is currently set in a target range of between 1.75 per cent and 2.00 per cent.

“In light of the economy’s impressive growth momentum, the upward trends in wage and price inflation, and the limited overall tightening in financial conditions achieved so far, on net we think the risks to the funds rate are tilted to the upside,” Goldman Sachs economists Jan Hatzius and others wrote in a preview of this week’s Fed meeting. — Reuters

 ??  ?? A congressio­nal aide holds flags to give to participan­ts at rally at the US Capitol in Washington. — Reuters photo
A congressio­nal aide holds flags to give to participan­ts at rally at the US Capitol in Washington. — Reuters photo

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