An­tic­i­pa­tion sur­rounds Fed’s rate fore­casts af­ter next hike

The Myanmar Times - - International Business -

THE Fed­eral Re­serve is set Wed­nes­day to mod­estly raise its key shortterm in­ter­est rate for the sec­ond time this year. But at­ten­tion will be fo­cused mainly on any hints that the Fed might ac­cel­er­ate its rate hikes in the com­ing months.

Some econ­o­mists think the Fed will sig­nal that it ex­pects to raise rates four times this year, up from its cur­rent pro­jec­tion of three hikes. Oth­ers be­lieve the cen­tral bank will stick with its pro­jec­tion of three rate in­creases, partly out of con­cern that ris­ing trade ten­sions trig­gered by Pres­i­dent Don­ald Trump’s ag­gres­sive poli­cies might slow global growth.

The pol­i­cy­mak­ers will re­veal their ac­tion in a pol­icy state­ment and in up­dated eco­nomic fore­casts, fol­lowed by a news con­fer­ence by Chair­man Jerome Pow­ell. Some an­a­lysts are spec­u­lat­ing that Pow­ell may an­nounce that he will be­gin hold­ing a news con­fer­ence af­ter each of the eight pol­icy meet­ings the Fed holds each year, rather than only once a quar­ter.

The Fed’s meet­ing this week will be fol­lowed by pol­icy meet­ings of two other ma­jor cen­tral banks — the Euro­pean Cen­tral Bank on Thurs­day and the Bank of Ja­pan on Fri­day. While Ja­pan’s cen­tral bank isn’t ex­pected to make any ma­jor pol­icy shifts, an­tic­i­pa­tion is ris­ing that the ECB may out­line as early as this week plans to be­gin par­ing its bond-buying stim­u­lus pro­gram as a pre­lude to end­ing them al­to­gether.

When the Fed last met in May, it left its short-term rate un­changed. But it noted that in­fla­tion was edg­ing near its 2 per­cent tar­get af­ter years of re­main­ing un­de­sir­ably low. Should in­fla­tion even­tu­ally pick up, the Fed might move to tighten credit more ag­gres­sively.

A grad­ual rise in in­fla­tion is co­in­cid­ing with new­found eco­nomic strength. Af­ter years in which the econ­omy ex­panded at roughly a tepid 2 per­cent an­nu­ally, growth could top 3 per­cent this year. Con­sumer and busi­ness spend­ing is pow­er­ing the econ­omy, in part a re­sult of the tax cut Pres­i­dent Don­ald Trump pushed through Congress late last year.

With em­ploy­ers hir­ing at a solid pace month af­ter month, un­em­ploy­ment has reached 3.8 per­cent. Not since 1969 has the job­less rate been lower.

Be­gin­ning in 2008 in the midst of the fi­nan­cial cri­sis, the Fed kept its key rate un­changed at a record low near zero for seven years. It then raised rates once in 2015, once in 2016, three times in 2017 and once so far this year, in March. Wed­nes­day’s ex­pected quar­ter-point rate in­crease will raise the Fed’s bench­mark rate to a range of 1.75 per­cent to 2 per­cent.

Mark Zandi, chief econ­o­mist at Moody’s An­a­lyt­ics, said he thinks stronger growth and ris­ing in­fla­tion will lead the Fed to raise rates four times this year and four more in 2019.

The Fed aims to achieve its man­dates of max­i­miz­ing em­ploy­ment and sta­bi­liz­ing prices by low­er­ing rates to spur growth dur­ing times of eco­nomic weak­ness and rais­ing rates to slow growth if the econ­omy threat­ens to over­heat. When the Fed tight­ens credit, it aims to do so with­out de­rail­ing the econ­omy. But if it mis­cal­cu­lates and over­does the credit tight­en­ing, it can trig­ger a re­ces­sion.

The eco­nomic ex­pan­sion has sur­vived for nine years and is now the sec­ond-long­est in his­tory. It will be­come the long­est if it lasts past June 2019, at which point it would sur­pass the ex­pan­sion that lasted from March 1991 to March 2001.

While many econ­o­mists think the cur­rent ex­pan­sion will ex­ceed the 1990ƍs streak, some worry about what might oc­cur once the im­pact of the tax cuts be­gin to fade and the Fed’s grad­ual rate hikes be­gin to curb growth.

Diane Swonk, chief econ­o­mist at Grant Thorn­ton, sug­gested that the econ­omy could ex­pe­ri­ence a “growth re­ces­sion,” in which the gross domestic prod­uct slows so much that un­em­ploy­ment starts to rise.

The Fed’s pace of rate hikes for the rest of the year could end up re­flect­ing a tug of war be­tween a sturdy econ­omy and the risks to growth, in­clud­ing from a po­ten­tial trade war that could break out be­tween the United States and such key trad­ing part­ners as China, the Euro­pean Union, Canada and Mexico. All those coun­tries have vowed to re­tal­i­ate against any U.S. tar­iffs with their own penal­ties against U.S. goods.

A global trade war would risk cut­ting into U.S. eco­nomic growth by de­press­ing Amer­i­can ex­port sales and rais­ing in­fla­tion by mak­ing con­sumers and busi­nesses pay more for im­ports. – AP

Photo: AP

Fed chair Jerome Pow­ell.

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