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26 September 2018
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| Federal Reserve (The Total Investment & Insurance Solutions) |
The Federal Reserve is set Wednesday to raise interest rates for a third
time this year and possibly modify the likely direction of rates in the months
ahead.
The big question is whether the strong U.S. economy, which has been
fueled this year by tax cuts and increased government spending, could weaken
next year, especially if President Donald Trump's trade fights begin to inflict
damage and the benefits of tax cuts start to fade.
If the Fed finds that prospect likely, it might signal Wednesday that it
expects to slow its rate increases next year.
The Fed's key short-term rate — a benchmark for many consumer and
business loans — now stands in a range of 1.75 percent to 2 percent after two
quarter-point increases in March and June. A similar rate hike Wednesday would
raise that range to a still-low 2 percent to 2.25 percent.
Many analysts expect the economy to eventually weaken, in part from the
effects of the conflicts Trump has pursued with China, Canada, Europe and other
trading partners. If the economy should slow sharply in 2019, the Fed might
decide to pull back on its rate increases to avoid hampering growth too much.
In that scenario, it might raise rates only twice in 2019 and then retreat to
the sidelines to see how the economy fares.
Some analysts, though, say they think the momentum built up from the
government's economic stimulus will keep strengthening the job market and
lowering unemployment — at 3.9 percent, already near a 50-year low. A tight job
market could accelerate wages and inflation and prod the Fed to keep tightening
credit to ensure that the economy doesn't overheat.
Any light the Fed might shed on those questions could come in the
statement it will make after its latest policy meeting ends, in updated
economic and rate forecasts it will issue or in a news conference that Chairman
Jerome Powell will hold afterward.
The modest rate increase that's widely expected reflects the continued
resilience of the U.S. economy, now in its 10th year of expansion, the
second-longest such stretch on record. Most analysts expect the Fed to signal
that it plans to raise rates a fourth and final time this year, presumably in
December. The Fed's rate increases typically lead to higher rates on some
consumer and business loans.
Should neither Powell nor the Fed itself clarify expectations for the
months ahead, it could be because the policymakers are sharply divided and are
coalescing into two familiar opposing groups — "hawks" and
"doves."
Doves focus on the Fed's mandate to maximize employment and worry less
about inflation. Hawks tend to concern themselves more with the need to prevent
high inflation. One Fed board member, Lael Brainard, a leading dove, earlier
this month surprised some with a speech that emphasized her belief in the need
for continued gradual rate hikes.
By its latest reckoning, the Fed estimates its "neutral rate"
— the point where it's thought to neither stimulate nor restrain growth — at
around 2.9 percent. Two more hikes this year and two in 2019 would lift the
Fed's benchmark rate to that level.
Many economists worry that Trump's combative trade policies could
significantly slow the economy next year. Trump insists that the tariffs he is
imposing on Chinese imports, to which Beijing has retaliated, are needed to
force China to halt unfair trading practices. But concern is growing that China
won't change its practices, the higher tariffs on U.S. and Chinese goods will
become permanent and both economies — the world's two largest — will suffer.
Powell has so far been circumspect in reflecting on Trump's trade war.
The Fed chairman has suggested that while higher tariffs are generally harmful,
they could serve a healthy purpose if they eventually force Beijing to
liberalize its trade practices.
In the meantime, economists are divided over how many Fed rate increases
are likely in 2019. The projections range from as few as two to a total of four.The Total Investment & Insurance
Solutions
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