By Nick Timiraos 

The Federal Reserve is preparing to raise short-term interest rates by a quarter percentage point after its two-day policy meeting concludes Wednesday, which would be the ninth such move since late 2015.

Recent market turmoil has raised some doubts about whether the Fed would follow through on a rate increase, but economic data has been solid enough to justify a move that officials have hinted at for weeks.

Rather, the turbulence raises the prospect that revised projections of future rate moves and the outlook for inflation and growth suggest a slower pace of rate increases in 2019.

The central bank releases its policy statement and the forecasts at 2 p.m. EST. Fed Chairman Jerome Powell takes media questions at 2:30 p.m. Here's a look at what to watch:

Goodbye Guidance

Fed officials could modify key language in their statement. They want to signal less certainty over the path of interest rates without implying they are done raising them.

At issue is the guidance indicating "further gradual increases" will likely be needed to keep the economy on track. Officials have been debating how and when to usher this language out of the statement now that their policy path looks less certain than it did just three months ago.

Shedding this language would follow several other steps Mr. Powell has taken to drop such forward guidance from Fed statements this year. The statement issued last month was 303 words long, down from 446 at his first meeting as chairman in March.

Even if the statement features less forward guidance, the officials' quarterly rate projections, or so-called dot plot, still provide markets with a look at how Fed officials expect the economic outlook to unfold and how policy should respond.

Markets will pay greater attention to how officials' projections of rate increases in 2019 have shifted. Fed governor Michelle Bowman attends her first Fed meeting, adding one participant to the dot plot since the last round of submissions in September.

In September, nine of 16 participants expected the Fed to raise rates three or more times next year, assuming a December rate increase, Some seven participants had the Fed raising rates two times or less, putting the median projection at three.

For the median projection to fall from three to two increases, then, at least one of the nine participants in the first group would need to lower their projection, and Ms. Bowman would need to project no more than two increases.

Economic Projections

The economic projections are likely to see fewer changes than at earlier meetings this year, when officials were raising growth estimates because of new fiscal stimulus. Inflation has been soft in recent months, which raises the prospect that officials will nudge down their projections.

A downward revision in the unemployment rate estimated to prevail over the long run would also signal less concern about the labor market overheating.

The biggest change to the economic outlook has come through a stock market selloff and stronger dollar that could tighten financial conditions, leading to slightly slower growth next year. An index tracking financial conditions maintained by Goldman Sachs has tightened by 0.8 percentage point since Fed officials raised rates in September.

The Fed wants to slow the economy when it raises rates, but there are questions over whether the recent tightening in conditions could become more severe than policy makers want. Goldman estimates the drag from tighter financial conditions could shave between 0.75 and 1 percentage point from GDP growth next year.

The Press Conference

Look for Mr. Powell to address worries about a turbulent stock market by pointing to relatively solid economic statistics, few of which are flashing yellow lights.

The rate-sensitive housing sector has slowed, though a recent drop in mortgage rates below 5% could help sales if rates hold near recent three-month lows. Other figures, including employment, retail sales and consumer sentiment, have been strong. And both factory and services-sector activity were firm in November, according to purchasing-managers indexes compiled by the Institute for Supply Management.

The big question for markets and the Fed right now is how much the recent selloff is due to economic reasons. If the current market scare is overdone, Fed officials don't want to overreact. Stressing their flexibility to adjust policy based on incoming data preserves the option to raise rates again in March or May if stock markets recover and the economy isn't dented by the recent market turbulence.

At the same time, they don't want to inflict fresh harm on markets by cavalierly talking up the path of rates, especially if markets have sniffed out economic weakness in the U.S. or abroad that hasn't shown up in data.

(END) Dow Jones Newswires

December 19, 2018 05:44 ET (10:44 GMT)

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