Fed’s Rate Decision: What to Watch For
WASHINGTON — The Federal Reserve is widely expected to announce its first interest rate increase of 2018 at the conclusion of its two-day policy meeting on Wednesday as the United States economy continues to strengthen.
■ Wall Street analysts surveyed by CNBC unanimously expect the Fed to raise its benchmark interest rate by a quarter of a percentage point, to a range of 1.5 percent to 1.75 percent.
■ Fed watchers are divided over how many increases to expect in 2018 as the Fed continues its steady march back toward more historically normal interest rates. Some analysts believe that Fed officials will signal they are on course for a total of three rate increases in 2018, as they did at the Fed’s December meeting. Others expect a turn toward the hawkish, with an indication of four increases.
■ This will be Jerome H. Powell’s first policy meeting and news conference as Fed chairman. Mr. Powell, a former Fed governor, succeeded Janet L. Yellen last month. Analysts do not expect him to deviate from Ms. Yellen’s preferred path of slow and steady rate increases, nor to wade too deeply into controversial topics, such as the tariffs announced by President Trump.
Slow and Steady
The Fed, under Ms. Yellen, pursued gradual rate increases and a highly choreographed sell-off of the portfolio of bonds it bought to help prop up the economy after the 2008 financial crisis. Mr. Powell was among the governors who voted for that approach, and he is expected to reaffirm it, particularly if economic growth continues to accelerate and unemployment remains at or below the 4.1 percent level it reached in February.
A rate increase this month would make clear the Fed’s gathering confidence in the economy as well as its focus on the potential for inflation, which has remained persistently muted throughout the expansion.
“We think Fed officials will view the growth and inflation data in recent months as encouraging,” analysts at Goldman Sachs wrote in a research note ahead of the meeting, “particularly with tax cuts now implemented and with an additional fiscal boost from federal spending arriving this year.”
How Many Increases?
Fed officials indicated in December that they expected to raise rates three times in 2018. Now some analysts say a short-term economic stimulus from Congress — in the form of a $1.5 trillion tax cut and federal spending increases — could push the Fed to add a fourth rate move. On Wednesday, the Fed’s intentions will be reflected in the so-called “dot plot,” which charts the expectations for future rate increases from every member of the Federal Open Market Committee.
A potential fourth increase would be motivated by rising concerns about an overheating economy, with such low unemployment that it sets off an inflationary spiral as companies lift wages to compete for scarce workers and increase prices to pay for those higher salaries. A portion of the voting membership of the committee rotates every year among the Fed’s regional bank presidents. The new members tend to worry more about inflation than those they replaced. Even some members who have fretted more about growth than inflation appear to be shifting their calculus.
Lael Brainard, a Fed governor who has been less hawkish than many of her colleagues, said in a speech this month that in many ways, “today is the mirror image of the environment we confronted a couple of years ago.”
“In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy,” she added. “Today, with headwinds shifting to tailwinds, the reverse could hold true.”
A Case for Caution
If the Fed sticks to three planned rate increases this year, analysts will point to lingering uncertainties in the recovery, including structural issues like a ballooning debt load and trade barriers that could turn the economy’s tailwinds back into headwinds.
Recent data suggest that economic growth is falling short of expectations for the first quarter. Wage growth appears to be improving, but the signs are mixed. Markets have been rattled in recent weeks by Mr. Trump’s tariff plans and embrace of a potential trade war. The Fed seems unlikely to react strongly to any one of those factors, but taken together, they could prod officials into pushing any additional rate move into 2019.
Powell’s Big Performance
Though this will be his first news conference as Fed chairman, Mr. Powell has already faced tough questioning during two days of congressional hearings in February and March. He struck a careful tone in those appearances, saying he had upgraded his own economic outlook but saw no evidence yet of overheating in the economy.
Mr. Powell also offered only gentle criticism of Mr. Trump’s planned tariffs on imported steel and aluminum. He praised free trade in general, while acknowledging that it had hurt some workers by shifting jobs overseas, and added, “The best approach is to deal directly with the people who are affected rather than falling back on tariffs.”
Reporters are likely to push Mr. Powell more on that subject, especially with Mr. Trump’s tariffs scheduled to take hold this week and the administration readying a round of trade penalties aimed directly at China. Analysts expect him not to rock markets with any surprise opinions, in line with his performance in front of Congress.
“He came off fairly polished in that, as if he wasn’t nervous about being there,” said Tim Duy, a University of Oregon economist who writes the Fed Watch blog. “I would expect him to be similar in this news conference. He’s not going to drop any bombshells.”