Fed set to keep rates amid signs of rising inflation
The Federal Reserve achieved an inflation milestone this week, but that isn’t likely to alter expectations for what the Fed will announce when its latest policy meeting ends Wednesday.
After six years of mostly missing its annual two percent target for inflation, the Fed learned Monday that its preferred gauge of consumer inflation had reached a year-over-year pace of two percent. And in the coming months, inflation is widely expected to stay around that level.
The debate the Fed is now likely to have is whether it should accept a period in which inflation rises above two percent without accelerating its pace of rate increases. But for now, a rate increase is considered unlikely. In a statement it will issue Wednesday afternoon, the Fed is expected to leave its benchmark rate unchanged at a still-low level of 1.5 percent to 1.75 percent.
Solid economic growth, low unemployment and evidence of inflation pressures, though, are expected to keep the central bank on a path of gradual rate hikes the rest of the year. Most Fed watchers foresee either two or three additional increases in the Fed’s key rate by year’s end, coming after an earlier hike in January.
The central bank is meeting as its board is undergoing a makeover, with a raft of new appointees by President Donald Trump who appear generally supportive of the Fed’s cautious approach to rates since the Great Recession ended.
Despite Trump’s complaints during the presidential race that the Fed was aiding Democrats in keeping rates ultra-low under President Barack Obama, his choices for a chairman and for other slots on the Fed’s board have been moderates rather than hard-core conservatives who would favor a faster tightening of credit.
“The Trump Fed could have been a much more hawkish Fed but so far, these choices are pretty middle-of-the road,” said Diane Swonk, chief economist at Grant Thornton in Chicago.
As Jerome Powell, Trump’s hand-picked new Fed chairman, said at a news conference after the central bank’s most recent meeting in March, “We’re trying to take the middle ground, and the committee continues to believe that the middle ground consists of further gradual increases in the federal-funds rate.” Bond investors are signaling that they expect a pickup in US inflation, having bid up the yield on the 10-year Treasury note last week above three percent before the yield settled just below that by week’s end. A year ago, the 10year yield was just 2.3 percent.
Under Powell’s predecessors, Janet Yellen and Ben Bernanke, the Fed’s board endured criticism from House Republicans over its decision to pursue a bond purchase program designed to lower long-term borrowing rates and to leave its key rate at a record low near zero for seven years. The critics charged that those policies would eventually produce destructive bubbles in the prices of stocks and other assets and, eventually, undesirably high inflation. /