Five things to watch for in Fed meet­ing

The Denver Post - - OPINION - By Mohamed El-Erian

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.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.