Fed to hint at Trump effect on economy

WASHINGTON. — The Federal Reserve was yesterday widely expected to raise interest rates, but, more significantly, to give its strongest hint yet on how the Trump administration’s tax overhaul could affect the U.S. economy.

Investors will pay close attention to how the central bank aims to balance a stimulus-fuelled economic boost with the ongoing weak inflation and tepid wage growth that has curbed some policymakers’ appetite for higher rates.

The Fed’s policy statement and its latest economic projections are due to be released Wednesday following the end of a two-day meeting. Fed Chair Janet Yellen is scheduled to hold a press conference half an hour later. It will be her last before her four-year term ends early next year.

Her successor, Fed Governor Jerome Powell, said at his recent confirmation hearing before a Senate panel that he had “no sense of an overheating economy,” an early signal he may not want to quicken the pace of rate increases until there is evidence of an acceleration in wage growth and inflation.

The Fed has increased rates twice in 2017 and is currently expected to push through three more hikes next year.

Much of Yellen’s tenure as Fed chief has been defined by a desire to leave loose monetary policy in place as long as possible in the hope that unemployment continued to decline, workers rejoined the labour force, and wages rose.

Powell, who has worked closely with Yellen, said he feels that process still has room to run.

Recent bullish data, highlighted by continued solid job gains and a jump in economic growth, has prompted some analysts to speculate that the central bank’s new projections will reflect an expectation of four rate increases next year.

There are also signs inflation may be firming after a lengthy bout of weakness, though data released by the Labour Department early on Wednesday showed some unexpected weakness in consumer prices.

Fed policymakers have been stymied at how price rises have remained persistently below the central bank’s 2 percent target despite labour market strength and a growing economy.

President Donald Trump’s proposed tax plan, including a sharp reduction in the corporate income tax, could further boost the US economy if it passes the Republican-controlled Congress, as appears likely.

In a recent note projecting four Fed rate increases next year, Paul Ashworth, US economist for Capital Economics, said “the stimulus could provide cover for the Fed to normalise interest rates at a faster pace than it otherwise would have been able to.”

What Ashworth called a “badly timed” tax cut “would be expected to raise inflation as much as it boosted real GDP growth,” he said. Reuters