USA TODAY International Edition
Fed likely to stand on interest rate
Lack of movement prompts controversy
A closely divided Federal Reserve is expected to hold interest rates steady again this week — a decision that should lift volatile markets while generating growing controversy among economists.
After all, standing pat for a sixth- straight meeting would mark a significant change of heart for Fed policymakers: After predicting in December that they would hike rates four times this year, they’d be positioned to pull the trigger just once — at most.
Has the economic outlook changed so drastically?
Not according to some economists. “The ( economic) data has cleared their hurdle,” says Michael Gapen, chief U. S. economist of Barclays and former head of a Fed monetary policy division. “I think there’s a credibility issue” if policymakers don’t raise rates.
The wild card, however, seems to be an economy that can’t seem to regain its mojo seven years after the Great Recession because of some deep- seated obstacles.
The Fed, which begins a twoday meeting Tuesday, keeps rates low to stimulate borrowing and economic and job growth, and raises them to head off excessive inflation.
It has stood pat since lifting its key rate in December from near zero to 0.4% — the first hike since the financial crisis.
When the Fed held off on rate hikes earlier this year, central bank officials cited factors such as China’s economic slowdown, the impact of the Brexit vote, the spring lull in U. S. job growth and a stock sell- off. All of those concerns largely have eased, Gapen says
Meanwhile, a core measure of inflation remains below the Fed’s 2% target, but it has risen modestly and remains on track to meet year- end Fed forecasts, he says. And monthly job growth has averaged 181,000 this year, below last year but well above the pace needed to bring down the unemployment rate, now a near- normal 4.9%.
“We find the generally in- line performance of the economy this year difficult to square with the policy path that the ( Fed) has chosen,” Goldman Sachs wrote in a note to clients. Morgan Stanley, however, points out that economic growth has averaged a paltry 1% at an annual rate the past three quarters. Some of that can be blamed on temporary factors, such as the oil industry slump and a strong dollar that has hurt exports. But Fed Chair Janet Yellen also has voiced concerns about more persistent headwinds, such as meager productivity growth and an aging population. That prompted Fed policymakers to lower their economic growth forecast in June, and Morgan Stanley expects a further markdown this week from 2% to 1.8% annually over the next few years. Fed officials have noted that weaker growth warrants a lower benchmark interest rate. Morgan Stanley predicts policymakers’ forecast this week for the key rate will fall to 1.9% at the end of 2018, down from 2.4% in June and 3% in March. Further tossing cold water on rate- hike talk has been a soft August jobs report, a sharp drop in both service- sector and manufacturing activity, and weak auto sales. “The set of prevailing conditions do not support a rate hike at this time,” Morgan Stanley wrote.
Yet Fed officials seem to be as split as economists.
Gapen says he believes five of the 10 voting policymakers would prefer to make a move. They argue waiting could require more rapid hikes when inflation picks up, risking recession.
Yellen appears to be among a few whose leanings aren’t clear, and so the decision could be a close call.
But she and other officials who steer policy have given no clear signal of a rate increase. And they’ve been averse to roiling markets when investors aren’t expecting a move, economists say.