WASHINGTON”•The US Federal Reserve on Tuesday began a two-day review of monetary policy, with the second interest rate increase of 2017 seen as a near certain result.
Any increase, however, would come in the face of persistent signs of weakness in the world’s largest economy, which in recent months has seen slowing job growth and persistently low inflation.
In the latest data released Tuesday, the Producer Price Index, which measures input costs for sellers, was flat in May, albeit largely due to sharp declines in the costs for food and fuel.
At its most recent meeting last month, the Fed’s policy-setting Federal Open Market Committee left the target range for its benchmark interest rate at between 0.75 and one percent.
Members said economic weakness was likely only “transitory,” and a rate hike was likely to be needed “soon,” although they said they would wait to see evidence the economic recovery had resumed before taking the next step.
Futures markets on Tuesday indicated a near 100 percent probability the Fed would increase the key lending rate at the conclusion of its meeting on Wednesday.
Jared Bernstein of the Center on Budget and Policy Priorities told AFP the Fed is likely to increase rates to ensure it will have room to maneuver and lower rates again in the event of a negative shock to the economy.
“That’s a somewhat unfortunate way of thinking about it because you risk slowing the economy down in order to avoid an economic slowdown,” Bernstein said.
But the weak recent economic data have left the course of interest rate policy for the rest of the year in doubt. The FOMC’s forecasts projected a total of three rate increases this year, but that could change in the new quarterly projections released on Wednesday.
Federal Reserve chair Janet Yellen will hold her quarterly press conference after the meeting and her comments will be scrutinized for any hints on whether a third rate hike is likely this year, and whether it would happen in September or be pushed back to December.
Joseph Gagnon of the Peterson Institute for International Economics told AFP the economy is strong enough to justify this week’s expected rate hike, but the Fed might hold off from making another move.
“The more dovish thing that might hold them back is that core inflation is not really continuing to rise and wage pressures are pretty weak.”
Observers also will be watching the FOMC statement and Yellen’s briefing for more details about the Fed’s plans for drawing down its $4 trillion in securities holdings acquired during the global financial crisis.
The Fed last month announced the outlines of a plan to reduce its balance sheet in a gradual and clearly-telegraphed way to avoid roiling financial markets.
