Fed likely to raise rates at meet­ing

State­ment on econ­omy will be parsed for clues on fu­ture rate hikes.

Austin American-Statesman - - BUSINESS -

Send­ing sig­nals loud and clear, the Fed­eral Re­serve has left lit­tle doubt that it will raise in­ter­est rates Wed­nes­day for the third time since De­cem­ber 2015 to re­flect a con­sis­tently solid U.S econ­omy.

The rate in­crease will likely go down as one of the most tele­graphed ever, given that sev­eral Fed of­fi­cials, in­clud­ing Chair Janet Yellen, each let it be known over the past two weeks that they felt it was time to raise the Fed’s bench­mark short-term rate.

Their string of like-minded com­ments sur­prised many in­vestors, who had as­sumed that the Fed would wait un­til prob­a­bly June be­fore raising rates again. The think­ing was that the Fed would want to see whether Pres­i­dent Don­ald Trump’s am­bi­tious eco­nomic pro­gram of tax cuts, dereg­u­la­tion and higher spend­ing on the mil­i­tary and in­fra­struc­ture could pass Congress — and then as­sess how it might af­fect the econ­omy.

But af­ter the Fed of­fi­cials each sug­gested that the econ­omy’s gains had moved the cen­tral bank closer to its goals for em­ploy­ment and in­fla­tion, the like­li­hood of a rate hike af­ter the Fed ends its lat­est pol­icy meet­ing Wed­nes­day shot from around 20 per­cent to near 100 per­cent as esti-

mated by fu­tures mar­kets, ac­cord­ing to data tracked by the CME Group.

Now, the guessing switches to how many times the Fed may raise rates dur­ing 2017 — whether three times, as the mar­ket now ex­pects, or per­haps as many as four.

Yet re­gard­less of the an­swer, the mar­ket seems far less ner­vous about the prospect of rate in­creases than it was in re­cent years. In­vestors seem in­creas­ingly con­fi­dent that the U.S. econ­omy is vig­or­ous enough to with­stand mod­estly higher bor­row­ing rates.

Here are three things to watch for af­ter the Fed’s meet­ing ends:

State of the econ­omy

The Fed has man­aged its con­trol of in­ter­est rates with ex­ceed­ing cau­tion, be­gin­ning with an ini­tial hike in De­cem­ber 2015, which ended seven years of record-low rates near zero. It then waited an en­tire year be­fore raising rates again in De­cem­ber last year.

But in re­cent weeks, the view has taken hold, within and out­side the Fed, that the U.S. econ­omy has en­tered a new, stronger phase, with a job mar­ket near full health, ris­ing con­sumer and busi­ness con­fi­dence, a sturdy hous­ing mar­ket and in­fla­tion mov­ing closer to the Fed’s 2 per­cent tar­get. Nearly eight years af­ter the Great Re­ces­sion ended, the econ­omy seems less and less to need the sup­port of ul­tra-low bor­row­ing rates.

A ro­bust Fe­bru­ary em­ploy­ment report is­sued on Fri­day — 235,000 added jobs, brisk pay growth and a dip in the un­em­ploy­ment rate to 4.7 per­cent — was seen as the fi­nal ma­jor en­cour­ag­ing eco­nomic report the Fed needed to feel con­fi­dent about an­nounc­ing a rate in­crease.

What the Fed says in its state­ment Wed­nes­day as­sess­ing the health of the econ­omy will be parsed for clues to its think­ing about the pace of fu­ture rate in­creases.

Fore­cast and dot plot

Four times each year, the Fed up­dates the eco­nomic and in­ter­est-rate fore­casts of the 17 mem­bers of its pol­icy com­mit­tee — five board mem­bers (there are two va­can­cies) and 12 re­gional bank pres­i­dents. Each pol­i­cy­maker of­fers his or her own anony­mous fore­cast.

In­vestors and Fed watch­ers tend to scru­ti­nize those pro­jec­tions to de­ter­mine whether they think the cen­tral bank is grow­ing more op­ti­mistic about growth, un­em­ploy­ment and in­fla­tion. A shift in sen­ti­ment to­ward greater op­ti­mism could in­di­cate that the Fed is pre­par­ing to ac­cel­er­ate its pace of rate hikes.

Along with eco­nomic fore­casts, the Fed re­leases what has come to be called the “dot plot.” This is an il­lus­trated plot of dots, rep­re­sent­ing the ex­pec­ta­tions for each official for the path of the fed­eral funds rate, the Fed’s key pol­icy rate.

In De­cem­ber, the Fed raised that rate to a range of 0.5 to 0.75 per­cent, still quite low by his­tor­i­cal stan­dards.

Fed of­fi­cials stress that the dot plot is merely a pro­jec­tion of where rates might go and not at all a guar­an­tee. At De­cem­ber’s meet­ing, the pro­jec­tion from the dot plot was that the Fed would raise rates three times in 2017. But some economists are won­der­ing whether the new chart may es­ti­mate a higher num­ber of rate in­creases, re­flect­ing a brighter out­look for the econ­omy.

Yellen’s view

On Wed­nes­day, as she does af­ter four Fed meet­ings each year, Yellen will hold a news con­fer­ence.

The Fed chair is likely to stress many of the points she has made in re­cent speeches: That while the Fed is raising rates, the pace of the in­creases will likely re­main grad­ual and that rates will still be at his­tor­i­cally low lev­els.

For con­sumers and busi­nesses, that means that while loan rates will rise, they will re­main rel­a­tively low.

Yellen is sure to be asked for her views of the poli­cies be­ing pur­sued by the Trump ad­min­is­tra­tion. The pres­i­dent has vowed to dou­ble the econ­omy’s growth rate to 4 per­cent from around 2 per­cent over the past nearly eight years.

Trump has said his pack­age of tax cuts, dereg­u­la­tion, a tougher trade stance and in­creased spend­ing in such ar­eas as in­fra­struc­ture can achieve his growth goals.

But if the Fed starts to be­come con­cerned about in­fla­tion pres­sures at a time when the econ­omy is at full em­ploy­ment, an in­crease in the pace of rate hikes could make it harder for Trump to achieve his goals.

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