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The Fed and Interest Rates: What to Watch For Today Fed Raises Interest Rates as Focus Turns to 2018
(about 9 hours later)
WASHINGTON — The Federal Reserve will release a monetary policy statement and a set of economic forecasts at 2 p.m. on Wednesday, following a two-day meeting of its policymaking arm, the Federal Open Market Committee. WASHINGTON — • The Federal Reserve, in a widely expected decision, raised its benchmark rate by a quarter of a percentage point, to a range between 1.25 percent and 1.5 percent.
• Investors expect the Fed to respond to the strength of the economy by announcing a quarter-point increase in its benchmark interest rate, into a range between 1.25 percent and 1.5 percent. • The Fed also predicted stronger economic growth over the next three years. It forecast 2.5 percent growth in 2018, well above its previous forecast of 2.1 percent growth in 2018, which was published in September. Fed Chairwoman Janet L. Yellen said the faster growth forecasts reflect an assessment of the $1.5 trillion tax cut moving through Congress.
• The Fed’s economic forecast, which it updates quarterly, offers a chance for Fed officials to estimate the likely impact of the $1.5 trillion tax cut legislation currently before Congress. Most economists think the tax cut will increase growth in the short term, which could prompt the Fed to raise rates more quickly. • Officials did not deviate from their 2018 outlook for interest rates or inflation and continued to signal three interest rate hikes next year.
• Janet L. Yellen, the Fed’s outgoing chairman, is scheduled to hold her final news conference at 2:30 p.m. on Wednesday. Jerome H. Powell, a Fed governor, is awaiting Senate confirmation as the next Fed chairman. He is likely to replace Ms. Yellen at the end of her four-year term in early February. The Fed continues to raise interest rates because officials are confident that the economy is in good health. This is the third time the Fed has raised its benchmark rate this year.
The economy is humming along. Employers added 228,000 jobs in November, which exceeded expectations. Households are making and spending more money. Asset prices are rising. And Republicans are moving to pass a tax cut that President Trump describes as economic “rocket fuel.” In a statement published after a two-day meeting of its Federal Open Market Committee, the Fed said that recent economic data showed that “the labor market has continued to gain strength and that economic activity has been rising at a solid rate.”
All of which has convinced most Fed officials that it’s time for another rate hike. But the Fed remains cautious about raising rates too quickly. In an updated economic forecast, Fed officials predicted that inflation would stay below the Fed’s 2 percent target next year, and then stay at 2 percent in 2019 and 2020. With inflation expected to remain under control, Fed officials continued to predict a measured march toward higher rates. They forecast the Fed’s benchmark rate would rise to 3.1 percent by the end of 2020, up slightly from the last forecast of 2.9 percent.
The Fed held interest rates at a low level for years after the financial crisis, supporting the economic recovery by encouraging investors to take risks and businesses and consumers to borrow money. By raising interest rates, the Fed is gradually reducing the magnitude of that stimulus. Concern about the low level of inflation also led two officials to vote against the rate hike: Charles L. Evans, president of the Federal Reserve Bank of Chicago, and Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. In recent public remarks, both officials have said that the Fed should wait to increase rates until there is clearer evidence that higher interest rates are needed to prevent inflation from rising too quickly.
Ms. Yellen has said that another rate increase, like the Fed plans on Wednesday, would leave rates in a neutral range — neither stimulating the economy nor seeking to restrain growth. With Wednesday’s rate hike a foregone conclusion — investors had put the chances at 100 percent — attention focused on what the Fed had to say about next year.
The only major question mark is the persistent sluggishness of price inflation, which is on pace to undershoot the Fed’s 2 percent annual target for the sixth consecutive year.
Ms. Yellen and other Fed officials are convinced that inflation will gain strength in the coming months. Employers across the country are reporting increased difficulty in finding enough qualified workers. The most obvious solution is to offer higher wages, leading to higher prices.
But some Fed officials are concerned the Fed itself is contributing to the weakness of inflation.
Charles Evans, president of the Federal Reserve Bank of Chicago, argues that the Fed may be undermining inflation expectations by failing to demonstrate a determination to drive up the pace of inflation. And expectations about future inflation help to determine the pace of price increases.
If Wednesday’s decision to raise interest rates is not unanimous, the concern about inflation is the most likely reason.
With Wednesday’s rate hike a foregone conclusion — investors have put the chances at 100 percent — attention is mostly focused on what the Fed has to say about next year.
The Fed predicted in its last round of forecasts, in September, that it would raise rates three times in 2018 and twice more in 2019. Growth has since been stronger than the Fed expected, and a tax cut could shovel a little more coal into the engine, further fueling growth.The Fed predicted in its last round of forecasts, in September, that it would raise rates three times in 2018 and twice more in 2019. Growth has since been stronger than the Fed expected, and a tax cut could shovel a little more coal into the engine, further fueling growth.
Some Wall Street firms, including Goldman Sachs, predict that the Fed will end up raising rates four times next year as a response to stronger growth. Goldman also expects the Fed will raise rates three times in 2019, one more than the Fed’s September forecast.Some Wall Street firms, including Goldman Sachs, predict that the Fed will end up raising rates four times next year as a response to stronger growth. Goldman also expects the Fed will raise rates three times in 2019, one more than the Fed’s September forecast.
But the Fed may not change its official forecasts on Wednesday. Fed officials are wary of injecting the central bank’s views into the final stages of the political debate about tax cuts. Fed officials are wary of injecting the central bank’s views into the final stages of the political debate about tax cuts.
Mr. Powell said at his Senate confirmation hearing last month that the Fed did not plan to analyze the economic impact of the tax cuts until a final version of the bill is signed into law, which is expected to happen by Christmas. Jerome Powell, President Trump’s nominee to succeed Ms. Yellen, said at his Senate confirmation hearing last month that the Fed did not plan to analyze the economic impact of the tax cuts until a final version of the bill is signed into law, which is expected to happen next week.
Ian Shepherdson, chief economist, Pantheon Macroeconomics
“The key result of the growth revision to next year is that unemployment is now expected to end the year at 3.9%, down from the previous 4.1%. This looks hopelessly unrealistic to us. The Fed appears to be assuming either a surge in productivity growth or a leap in participation; they might happen but we think a more likely end-18 unemployment rate is 3.5% or less; had the Fed forecast that, they would have had to put in another rate hike in the dotplot for next year. The inflation forecasts for 2018-to-20 are all unchanged from September, despite the tighter labor market. In short, the Fed forecasts an endless expansion, with minimal inflation pressure, despite unemployment well below their Nairu estimate - unchanged at 4.6% - forever and interest rates peaking at 3.1%. We wish Jay Powell the best of luck; he’s going to need it.”
Aberdeen Standard Investments Investment Strategist Luke Bartholomew:
“Today was never really about the hike - that’s been in the bag for a while - it’s about what the Fed does next. It’s clear that the Fed thinks it can hike three more times next year. But that’s a forecast that markets don’t yet buy, and it’s data more than rhetoric that will ultimately convince investors.”
Andrew Wilson, Co-Head of Fixed Income at Goldman Sachs Asset Management:
“In 2018 we think that Powell will mirror Janet Yellen’s approach in 2017 and deliver three rate rises – more than the market is currently pricing in. Market expectations for US monetary policy are in our view too dovish, creating room for a pick-up in market volatility should the current Fed trajectory for rate hikes be recalibrated higher. Investors will be watching closely to see whether the Fed will be reactive to signs of higher inflation or pause to reassess its inflation outlook.”
The Fed’s course will be charted under new leadership. Ms. Yellen is scheduled to preside at one more meeting of the monetary policy committee, in late January, before stepping down in early February, assuming Mr. Powell is confirmed.The Fed’s course will be charted under new leadership. Ms. Yellen is scheduled to preside at one more meeting of the monetary policy committee, in late January, before stepping down in early February, assuming Mr. Powell is confirmed.
Other senior officials also have recently departed or are planning to do so.Other senior officials also have recently departed or are planning to do so.
Stanley Fischer resigned as the Fed’s vice chairman in October. William C. Dudley, the president of the Federal Reserve Bank of New York, said he plans to step down in mid-2018.Stanley Fischer resigned as the Fed’s vice chairman in October. William C. Dudley, the president of the Federal Reserve Bank of New York, said he plans to step down in mid-2018.
Replacements for Mr. Fischer and Mr. Dudley have not been announced, but Mr. Trump has already nominated a pair of new Fed governors: Randal K. Quarles, already installed as the vice chairman of supervision, and Marvin Goodfriend, who is awaiting Senate confirmation.Replacements for Mr. Fischer and Mr. Dudley have not been announced, but Mr. Trump has already nominated a pair of new Fed governors: Randal K. Quarles, already installed as the vice chairman of supervision, and Marvin Goodfriend, who is awaiting Senate confirmation.
And three more of the seven seats on the Fed’s board remain open and ready for Mr. Trump to fill.And three more of the seven seats on the Fed’s board remain open and ready for Mr. Trump to fill.