By Douglas Gillison
WASHINGTON–The US Federal Reserve was due to begin a two-day meeting Tuesday, having signaled it is likely to raise the benchmark interest rate as the world’s largest economy gains steam.
Any increase in the key federal funds rate would come a bit earlier than had been expected at the start of the year, with central bankers prodded to move by continued strong job creation and accelerating inflation.
The Fed move would come just as President Donald Trump lays the groundwork for expansionary economic policies, having pledged to return the United States to four percent annual growth by cutting taxes and regulation and boosting spending on infrastructure. The policy details, however, have been scarce.
The Federal Open Market Committee, which sets the federal funds rate, last moved in December but stood pat last month, adopting a wait-and-see approach as the new administration entered office.
The FOMC is due to announce its next decision on Wednesday afternoon. The target interest rate now stands at a range of 0.5 to 0.75 percent. Even after a quarter-point increase, it would still be low by historical standards.
“I think the Fed will say it was entirely prudent to take one more step right now,” Jon Faust, a former advisor to the Federal Reserve Board, told AFP recently.
“If things clearly continue in the same direction, we’ll take more. But that will depend on us seeing what happens in the data.”
The unemployment rate fell below five percent in May and the US economy has been adding jobs at an average of more than 200,000 net new positions over the last three months.
January also saw the Fed’s favored inflation measure hit its fastest 12-month pace in four years. The Fed will get one more piece of inflation data Wednesday, with the release of the latest consumer price index for February.
The question for Fed watchers now will be how many times the Fed may act during the rest of 2017, with the next meeting set to occur in June and a total of three rate increases expected this year.
Randall Kroszner, a former Federal Reserve Board governor, told AFP that with the economy beginning to hum, Fed Chair Janet Yellen was “certainly open” to the possibility of raising rates more quickly.
“They do want things to be gradual but they may need to move at a slightly faster pace,” Kroszner said.
Fed Chair Janet Yellen may offer additional clues during a press conference in Washington 30 minutes after the 2 p.m. release of a post-meeting statement and new projections.
The so-called “ dot plot,” which displays individual rate forecasts of officials on the policy-setting Federal Open Market Committee, will probably continue to show three hikes this year as appropriate, according to the median estimate. It was last updated in December and will cover projections out to 2019, plus an estimate for the longer run.
That would imply that a flurry of signals from policy makers in recent weeks about the likelihood of tightening in March was more about a shift in the timing than in the number of increases the FOMC is likely to approve this year, according to Jonathan Wright, an economics professor at Johns Hopkins University.
