Federal Reserve meeting is packed with intrigue
Keep an eye on economy, interest rates and what’s called “the Trump effect”
WASHINGTON» The Federal Reserve is all but certain Wednesday to raise its key shortterm interest rate for the third time this year and to signal that another hike is likely before 2018 ends.
But what about next year? Most economists foresee a slowdown in the nearly 10yearold U.S. economic expansion as President Donald Trump’s trade war takes a toll and the benefits of tax cuts start to fade.
Will the Fed feel compelled to slow its rate increases? Or will it keep steadily tightening credit to ensure that a robust economy, with unemployment near a 50year low, doesn’t ignite high inflation? Any clarity the Fed might provide Wednesday could come in a statement after its latest policy meeting, in economic and interestrate forecasts it will issue or in a news conference Chairman Jerome Powell will hold.
Whatever the central bank’s policymakers decide will affect the loan rates that consumers as well as businesses will face in the coming months.
Here are three things to watch for after the Fed meeting ends Wednesday.
State of the economy: The economy, fueled in part by the tax cuts Trump pushed through Congress, has been sizzling. Growth clocked in at a brisk 4.2 percent annual rate in the AprilJune quarter — the
fastest quarterly pace in nearly four years. Most economists have forecast that growth for 2018 as a whole will end up as the strongest in 13 years.
Unemployment, at 3.9 percent, is well below the 4.5 percent that the Fed had pegged as the level at which unemployment can remain for a sustained period without accelerating inflation.
Wednesday, in addition to announcing a likely rate increase — its eighth since late 2015 — the Fed will issue economic and interestrate forecasts for the rest of 2018 and for 2019, 2020 and 2021. Those forecasts will signal how the policymakers see the economy and interest rates evolving. A rosy picture would likely lead financial markets to brace for steady rate hikes to continue. Conversely, a dimmer forecast by the Fed could mean fewer rate increases in coming months and years. Range of interest rates: In addition to its predictions for the economy, the Fed will update its “dot plot,” in which each mem ber of its interest rate committee provides his or her anonymous forecast of where the Fed’s key policy rate will be in coming years. The dots will show where the officials expect the rate to be in the OctoberDecember quarter each year.
The median dot — where half are above, half below — is closely watched for the Fed’s view of where its key rate may be headed. The rate now stands in a range of 1.75 percent to 2 percent. In June, the median was pegged at 2.4 percent for the end of 2018, up from 2.1 percent previously.
That shift was seen as the signal that the Fed was prepared to raise rates a total of four times this year, with the remaining hikes presumably coming this week and in December.
The Trump effect: At Powell’s news conference, reporters probably will seek his views on the likely effects of Trump’s economic policies — from the tax cuts that are driving projected annual budget deficits above $1 trillion to the trade war Trump has triggered with China and other nations. In the past, Powell has taken care to strike an evenhanded response to such political questions.