With rate hike in the bag, focus turns to Fed’s policy language
WASHINGTON (Reuters) — With the Federal Reserve virtually guaranteed to raise interest rates this week, investors are focused on how the US central bank characterizes its monetary policy as borrowing costs return to more normal levels amid an ongoing economic expansion.
In what could be the most consequential rewrite of its policy statement in twoand-a-half years, the Fed may signal how close it is to stopping its rate hike cycle, whether faster economic growth warrants ramping up the pace of tightening, and if it feels the era of loose money is, in effect, over.
The language in the Fed policy statement “is growing increasingly stale with each successive rate hike,” Goldman Sachs economists Spencer Hill and Jan Hatzius wrote ahead of the start on Tuesday of the central bank’s two-day policy meeting.
Hatzius predicted the policy-setting Federal Open Market Committee will, at the least, drop language it has used since late 2015 that says rates would remain below historical levels “for some time” to come.
That small change would mark a broad acknowledgement that, nine years into the second-longest US economic expansion on record, monetary policy and the economy in general are starting to look increasingly normal, both domestically and abroad.
The Fed’s current monetary policy tightening cycle began in December 2015, and it has started trimming the massive portfolio of US Treasury bonds and mortgage-backed securities that it bought to boost the economy after the 2007-2009 recession.
The European Central Bank is expected later this week to outline its own plans to stop emergency asset purchases, highlighting Europe’s rebound from crisis.
Global growth has remained strong this year despite the risk of a global trade war and concerns about rising levels of sovereign debt.
Set against that backdrop, it makes little sense, say many analysts, for the Fed to keep promising to keep rates low as borrowing costs hit levels that are no longer considered low on an historic basis.
The Fed’s benchmark overnight lending rate, if lifted to a range of 1.75 percent to 2 percent this week, would be at a level comparable or above where it was from late 2001 to 2004, a period punctuated by the bursting of the technology bubble and the Sept. 11, 2001 attacks.
The Fed’s policy statement and fresh economic projections are due to be released at 2 p.m. EDT (1800 GMT) on Wednesday. Fed chairman Jerome Powell is scheduled to hold a press conference half an hour later.
“We see hawkish overtones from the decision to raise rates and our expectation that the statement will no longer say that the (federal) funds rate is likely to remain below the long-run neutral rate for some time,” Barclays analyst Michael Gapen wrote in a recent research note.
Fed policymakers’ updated forecasts will show whether they continue to expect only one additional rate increase over the rest of the year, or feel recent strong job and economic data justify a second one in the near term, and perhaps a boost to the number of rate hikes expected next year.
The US central bank raised rates in March and policymakers say they expect two more upward moves before the end of the year. The Fed raised rates three times last year.