Fed to make 3 key forecasts

WASHINGTON — The Federal Reserve is considered sure to leave its key shortterm interest rate unchanged Wednesday and to stress its new watchword — “patient”— in conveying its intention to leave rates alone for the foreseeable future.

The Fed has made clear that with a dimmer economic picture in both the United States and globally, it no longer sees the need to keep raising rates as it did four times in 2018. Among the key factors, besides slower growth, are President Donald Trump’s trade war with China, continually low inflation levels and Prime Minister Theresa May’s struggle to execute Britain’s exit from the European Union.

Besides issuing a policy statement Wednesday, the Fed will update its forecasts for the economy and interest rates, and Chairman Jerome Powell will hold a news conference. Here are three things to watch for:

Future rate changes

The Fed is set to leave its benchmark rate — which can influence everything from mortgages to credit cards to home equity lines of credit — unchanged in a range of 2.25 percent to 2.5 percent. But what about the rest of the year?

For that answer, analysts will be watching the socalled “dot plot.” This is an illustration in which each of the 17 members of the Fed’s interest rate committee provides his or her anonymous forecast of where their key policy rate will go. On Wednesday, the dots will show where the officials expect the rate to be at the end of 2019 and after each of the next two years. The median dot — where half are above, half below — is closely watched for the Fed’s view of where its key rate might be headed.

It isn’t always correct and can vary substantially, as it did over the course of 2018.

On Wednesday, many economists say they think the new dot plot will forecast just one rate increase this year. But traders in futures markets have put the probability of even one rate hike this year at zero percent, and one index says there’s a 25 percent chance the Fed will cut rates by year’s end.

Shrinking balance sheet

One of the extraordinary programs the Fed deployed after the 2008 financial crisis to stabilize the economy was the purchase of billions in Treasury and mortgage bonds. The idea was that these bond purchases would help hold down long-term borrowing rates and thereby stimulate borrowing and spending.

The Fed has been reversing this program since October 2017, allowing some maturing bonds to roll off its balance sheet rather than being reinvested. As a result, the balance sheet is now down from its peak of $4.5 trillion to $4 trillion.

As this runoff from the Fed’s balance sheet has proceeded, investors have grown worried that the Fed could overdo the bond reductions and inadvertently cause long-term rates to surge. That would risk depressing economic growth as well as stock prices.

Powell has suggested the Fed may stop the bond reductions soon, perhaps when the balance sheet is around $3.5 trillion.

Many analysts think the Fed will specify Wednesday at what point this year it plans to halt the reduction in its bond holdings — something of keen interest to financial markets.

Pace of growth

The U.S. economy grew 2.9 percent in 2018, its best showing since 2015, the government has estimated. President Donald Trump has hailed this achievement, and the budget plan he released last week projects sustained growth of 3 percent or better for years to come.

But the Fed and most private forecasters think those estimates are far too optimistic. They have suggested that a slower-growing workforce, reflecting the retirement of America’s baby boomers, and tepid productivity gains, along with a weaker global economy, will depress growth. In December, the Fed forecast growth of 2.3 percent this year, 2 percent in 2020 and just 1.8 percent in 2021.

Analysts will be watching the Fed’s updated forecasts to see whether it further downgrades its expectations for growth. Doing so would suggest that it has grown concerned about a global slowdown and may consider cutting rates to sustain the economic expansion and avoid a recession.

Whether such a message would cheer or spook the markets, though, is anyone’s guess.