Federal Reserve Expected to Raise Rates
December 13 2017 - 5:29AM
Dow Jones News
By Nick Timiraos
The Federal Reserve is likely to raise short-term interest rates
by a quarter percentage point after its two-day policy meeting
concludes Wednesday, the fifth such increase since the Fed began
raising rates from near zero two years ago. Officials also will
release new projections for unemployment, inflation, economic
growth and interest rates. The central bank will release its
statement and the forecasts at 2 p.m. EST, and Fed Chairwoman Janet
Yellen will take questions from the press at 2:30 p.m. Here's what
to watch:
Taxing Dilemmas
House and Senate lawmakers have moved rapidly to pass tax-cut
legislation that could add $1.4 trillion to budget deficits over a
10-year period before factoring in any additional revenue from
stronger economic growth. Since the two chambers haven't reconciled
their separate bills yet, Fed officials might not have enough
information to forecast how the economy will respond. But they
probably have enough information to expect more fiscal stimulus
than they did in projections released earlier this year.
Their new economic projections will show whether they expect
faster economic growth, higher inflation, lower unemployment or a
more aggressive path of interest-rate increases as a result. Ms.
Yellen likely will field questions on the issue at her press
conference.
Inflation: The Transitory Story?
The Fed is likely to announce it will raise its benchmark rate
to a range between 1.25% and 1.5% despite little evidence of a
pickup in inflation, which softened unexpectedly earlier this year.
Annual inflation nosed above the Fed's 2% target in February, but
was just 1.6% in October by the Fed's preferred gauge.
Ms. Yellen has said she expects soft inflation to prove
temporary, particularly given continued declines in the
unemployment rate and an economy growing at an annual rate between
2.5% and 3%. Officials' new projections will show whether they
still expect inflation to hit 2% by 2019, as they did in September.
And Ms. Yellen can expound on the inflation outlook at her press
conference.
Watch also to see if Minneapolis Fed President Neel Kashkari
again votes against the rate increase because of low inflation, and
whether anyone else joins him in dissent.
Financial Conditions
While soft inflation means some Fed officials want to go slower
on rate increases, easier financial conditions and concerns about
rising asset values provide ammunition for those who want to keep
up -- or pick up -- the pace. Each time the Fed has moved to make
monetary policy a little less easy this year, including by starting
to shrink its big bond portfolio, long-term rates have stayed low
or declined while stock prices have moved higher.
Ms. Yellen in the past has put more emphasis on labor-market
indicators, such as the unemployment rate, in arguing for the Fed
to gradually reverse its postcrisis stimulus measures. Watch what
Ms. Yellen says about financial stability risks and the
implications for the path of rates.
How Far From Neutral
With another rate increase, the Fed would be just a few more
moves away from neutral, or the level at which it is neither
stimulating or slowing growth. Fed officials expect this neutral
level to rise in the coming years, and one of the big questions at
this meeting concerns the path of rates in 2018 and 2019. With the
Fed's portfolio slowly shrinking, so-called policy normalization
has taken several steps forward this year. Watch the new
projections to see how much officials believe interest rates need
to rise from here and over what period of time.
Parting Reflections
President Donald Trump has nominated Fed governor Jerome Powell
to succeed Ms. Yellen in February, breaking with recent precedent:
The previous three Fed chairmen were all reappointed by presidents
from the opposite party that put them in office.
The central bank is set to gain several new policy makers next
year. The seven-member Washington-based board of governors now has
three vacancies, before Ms. Yellen's planned departure in February,
and the New York and Richmond reserve banks will get new
presidents.
Ms. Yellen's press conference Wednesday is her last such
scheduled appearance before her term ends Feb. 3, and she could
have an opportunity to reflect on her extensive experience at the
central bank as chairwoman, vice chairwoman, president of the San
Francisco Fed, a governor and a staff economist. With the
unemployment rate at 4.1% in November, Ms. Yellen is set to leave
the Fed at a time when the thorniest policy issues involve how to
keep the economy on an even keel and how to prepare for the next
downturn.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
December 13, 2017 05:14 ET (10:14 GMT)
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