Experts see Fed rate hike as first in series

Potential impact weighed ahead of announcement

The U.S. Federal Reserve is expected to announce Wednesday that it will raise its benchmark federal funds rate by a quarter percentage point to 0.75 per cent.

The Federal Open Markets Committee, which sets the Fed’s interest rate policy, met Tuesday. Going into the meeting, the outcome seemed a foregone conclusion. Last month Fed Chair Janet Yellen hinted that rates could rise “relatively soon.”

It’s little surprise, then, that every one of the 78 economists tracked by Bloomberg expects the Fed to raise the upper bound of the federal funds rate to 0.75 from 0.50 per cent.

That would be the first rate increase in a year. The real focus on Wednesday will be the language that accompanies the rate announcement.

The U.S. economy has been performing strongly, and a lot of economists expect Wednesday’s anticipated rate hike to be the first in a series. Still, they’ll be reviewing every word in the announcement with the same fervour as an evangelist ponders every syllable in one of St. Paul’s epistles.

“We suspect one key takeaway from all the day’s policy pronouncements will be that we won’t have to wait another year for rate hike three,” wrote Michael Gregory, deputy chief economist with BMO Capital Markets, in a note.

Donald Trump has yet to be sworn in as U.S. president, and there is uncertainty on what he will actually do in the coming year. Trump has promised tax reform, infrastructure spending and deregulation.

Those should have fiscal impacts, but it’s too early to determine their degree, economists say.

Currency and bond markets have embraced Trump’s election in anticipation his administration will benefit investors. Yet some economists wonder whether markets are also pricing in the potential adverse consequences Trump’s policies might have on the trade front. Economists will be looking to see how the Fed’s statement reconciles recent strong economic data, the bullish outlook of bond and currency markets, and the uncertain impact of future administration policy.

Derek Holt, a vice-president with Scotiabank Economics, expects the Fed to take a dovish stance because of the uncertainty.

“The likely pain precedes the uncertain gain when it comes to Trumponomics and the Fed is likely to buy some time to assess this risk by retaining a very gradual bias on future rate moves.”

By the Fed’s own estimates, the U.S. economy is pretty sound. The Fed expects U.S. GDP to grow by two per cent in each of 2017 and 2018.

It expects U.S. inflation to rise to 1.9 per cent in 2017 and hit the Fed’s 2.0 per cent inflation target in 2018. And the Fed expects U.S. unemployment, currently 4.8 per cent, to drop to 4.6 per cent next year and 4.5 per cent in 2018.

What perplexes some economists is that Trump’s policies seem better designed for an economy that is struggling, not one operating near full capacity.

Beata Caranci, chief economist with TD Bank Group, writes Trump’s policies could add somewhere between 0.2 and 1.0 percentage points to GDP. Yet that growth, if it materializes, is contingent on several assumptions. One is that Trump’s tax and spending plans don’t hike the U.S. budget deficit. Another is that the government stimulus spending has to trigger some net payback or “fiscal multiplier” within the economy. Such multipliers have less impact when an economy is moving full tilt.

“For economists, the devil is in the details and these are in very short supply,” Caranci says.