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2 May 2018
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Federal reserve (The Total Investment & Insurance
Solutions)
The Federal Reserve achieved an inflation milestone this
week, but that isn't likely to alter expectations for what the Fed will
announce when its latest policy meeting ends Wednesday. The Total Investment & Insurance Solutions
After six years of mostly missing its annual 2 percent
target for inflation, the Fed learned Monday that its preferred gauge of
consumer inflation had reached a year-over-year pace of 2 percent. And in the
coming months, inflation is widely expected to stay around that level. The Total Investment & Insurance Solutions
The debate the Fed is now likely to have is whether it
should accept a period in which inflation rises above 2 percent without
accelerating its pace of rate increases. But for now, a rate increase is
considered unlikely. In a statement it will issue Wednesday afternoon, the Fed
is expected to leave its benchmark rate unchanged at a still-low level of 1.5
percent to 1.75 percent.
Solid economic growth, low unemployment and evidence of
inflation pressures, though, are expected to keep the central bank on a path of
gradual rate hikes the rest of the year. Most Fed watchers foresee either two
or three additional increases in the Fed's key rate by year's end, coming after
an earlier hike in January. The
Total Investment & Insurance Solutions
The central bank is meeting as its board is undergoing a
makeover, with a raft of new appointees by President Donald Trump who appear
generally supportive of the Fed's cautious approach to rates since the Great
Recession ended.
Despite Trump's complaints during the presidential race
that the Fed was aiding Democrats in keeping rates ultra-low under President
Barack Obama, his choices for a chairman and for other slots on the Fed's board
have been moderates rather than hard-core conservatives who would favor a
faster tightening of credit.
"The Trump Fed could have been a much more hawkish
Fed but so far, these choices are pretty middle-of-the road," said Diane
Swonk, chief economist at Grant Thornton in Chicago. The Total Investment & Insurance Solutions
As Jerome Powell, Trump's hand-picked new Fed chairman,
said at a news conference after the central bank's most recent meeting in
March, "We're trying to take the middle ground, and the committee
continues to believe that the middle ground consists of further gradual
increases in the federal-funds rate."
Bond investors are signaling that they expect a pickup in
U.S. inflation, having bid up the yield on the 10-year Treasury note last week
above 3 percent before the yield settled just below that by week's end. A year
ago, the 10-year yield was just 2.3 percent. The Total Investment & Insurance Solutions
Under Powell's predecessors, Janet Yellen and Ben Bernanke,
the Fed's board endured criticism from House Republicans over its decision to
pursue a bond purchase program designed to lower long-term borrowing rates and
to leave its key rate at a record low near zero for seven years. The critics
charged that those policies would eventually produce destructive bubbles in the
prices of stocks and other assets and, eventually, undesirably high inflation.
But so far, Trump's reshaping of the Fed's board reflects
a generally status quo approach. The Total Investment & Insurance Solutions
"Trump's criticisms during the campaign have not
been borne out by his decisions on who to put on the Fed," said Mark
Zandi, chief economist at Moody's Analytics. The Total Investment & Insurance Solutions
Since the Fed began raising rates in December 2015, the
pace has been modest and gradual: One quarter-point rate increase in 2015, one
in 2016, three in 2017 and one so far this year. The Total Investment & Insurance Solutions
When the Fed announced its most recent rate hike in
March, it forecast that it would raise rates twice more this year. But some
economists think that the Fed will respond to the increased government stimulus
in the form of tax cuts and higher spending to accelerate the rate hikes
slightly from three to four this year.
Congress in December passed a $1.5 trillion tax cut that
took effect in January. And then in February, it approved $300 billion more in
government spending for this year and next year. That stimulus, coming at a
time when unemployment is at a 17-year low of 4.1 percent, could raise the
threat of higher inflation.
Yet even against this backdrop, the prevailing view is
that the Trump-shaped Fed will remain cautious about rate increases.
"The central bank does not want to make the mistakes
made in the past when the Fed raised rates too high, too fast and became the
No. 1 cause of a recession," said Sung Won Sohn, an economics professor at
California State University, Channel Islands.The Total Investment & Insurance Solutions
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