WASHINGTON, Dec 19, 2018 (BSS/AFP) – The US Federal Reserve is expected to
raise the benchmark lending rate on Wednesday but to accompany that with a
strong sign it will hold off on future increases.
But the outcome of the two-day monetary policy meeting is perhaps the most
uncertain of any in the past decade. A remarkably low 72 percent of market
participants expect an increase in the federal funds rate which is used to
set the cost of borrowing for everything from homes to cars.
The move seems certain to anger President Donald Trump who has attacked
the Fed repeatedly on Twitter for even considering going ahead with the
fourth hike this year in the federal funds rate.
But with increasing signs the US economy may have peaked causing stock
markets to crumble in recent weeks, what analysts and investors are looking
for is confirmation the central bank will stand on the sidelines for a time.
While economic conditions have not “changed enough yet to cause a dramatic
slowing in growth” of the US economy, “Fed officials are widely expected to
deliver a ‘dovish hike,'” Jim O’Sullivan of High-Frequency Economics said.
That entails raising the benchmark interest rate to 2.5 percent from 2.25
percent but removing language from the statement that had for months promised
“further gradual increases.”
The Fed also will release the quarterly forecasts from the policy
committee members, which seems likely to show they expect to raise rates only
once or twice next year rather than the three hikes previously expected.
Fed Chairman Jerome Powell will hold a press conference after the meeting,
which will give him the opportunity to explain the message to financial
markets.
– ‘Economically illiterate’ –
The US economy remains strong with unemployment at a nearly 50-year low at
3.7 percent, inflation barely at two percent and business confidence
persistently high.
But cracks have started to appear and many economists now say the economy
may have peaked, especially since the housing market has been trending
downwards in recent months.
Trump’s trade wars and signs China’s economy is slowing have added to the
global uncertainty.
Powell in recent statements shifted gears to indicate the central bank is
considering suspending its rate increases while it takes time to view more
economic data.
In a speech in mid-November, he likened it to someone walking through a
dark room full of furniture: “What do you do? You slow down, you stop
probably and feel your way. It’s not different with policy.”
The Fed has increased the key lending rate eight times since December
2015, bringing it up to 2.25 percent after a long stretch at zero in the wake
of the global financial crisis.
Trump would rather the Fed stop now and continue to help boost the
economy, warning in his latest attack on Twitter that the central bank would
be making “yet another mistake” by raising interest rates on Wednesday.
Trump has repeatedly broken with the norm respected by US presidents of
recent decades who refrained from criticizing the Fed.
Analysts and former Fed members warn that Trump’s unprecedented vitriol
could cause central bankers to try to prove their independence by raising
rates even if they might otherwise have held off.
“Reputations take a long time to build but can be lost very quickly and
we’re pretty sure that Jay Powell does not want to go down in history as the
Fed Chair who was pushed around by an economically illiterate president,” Ian
Shepherdson of Pantheon Macroeconomics said in a client note.