Five things to watch for in Fed meeting
The Dec. 14 announcement by the Federal Open Market Committee will be of particular interest, for what it says about any change in interest rates, but also for its signals about the path ahead. Here are five things that are likely to emerge from the statement by the Federal Reserve’s policymaking committee and the ensuing press conference by Fed Chair Janet Yellen.
• The Fed will hike rates by 25 basis points, only the second increase in 10 years. This will be driven by additional progress toward its dual objectives — full employment and inflation converging to 2 percent — along with a desire to validate high market expectations about rates, and to respond to diminished headwinds from abroad.
• In terms of these dual objectives, the Fed’s policy deliberations will be influenced by the decline of the unemployment rate to 4.6 percent along with the sluggish participation rate, despite continued solid job creation. When it comes to inflation, the inclination to embrace the rise in market expectations will be tempered by declines in the growth rate of average hourly earnings.
• On forward guidance, the Fed will keep open the possibility of multiple hikes in 2017. This is due not only to its anticipation of a solid economic baseline for next year but also the new upside for growth and inflation associated with the recent policy announcements by President-elect Donald Trump. An important consideration here is the degree to which a more active fiscal policy, especially if led by productive infrastructure spending, would allow faster normalization of monetary policy.
• For the first time in a long while, the FOMC’s “blue dots” — the expectations of individual members of the Fed board for the future path of rates — will not migrate down significantly. Instead, they will remain broadly unchanged.
• Nonetheless, the Fed’s signals of a somewhat tighter monetary policy will be nuanced, and with good reason. U.S. central bankers will wish to wait for the details of the Trump administration’s economic policies before moving toward significant alterations of a forward guidance that remains heavily “data dependent.”
Like many others, I suspect that Fed officials are in the initial stages of internalizing the unexpected political and market developments of the last month. Central bankers will be intrigued by the possibility of a larger window for normalizing a monetary policy stance that, as it stands, carries unsettling risks of collateral damage and unintended consequences. But given their need to see how Trump’s announcements translate into design and implementation, they will be careful not to move prematurely.