3 things to watch for from the Federal Reserve on Wednesday

AP News
|
Posted: Dec 13, 2016 2:07 PM
3 things to watch for from the Federal Reserve on Wednesday

WASHINGTON (AP) — By just about everyone's estimation, the Federal Reserve will have an announcement to make Wednesday afternoon: It's raising interest rates.

The expected hike, the Fed's first since last December, will signal its view that the U.S. job market and economy are nearing full health, with the unemployment rate at an unusually low 4.6 percent. It would also mean that rates on some consumer and business loans will likely increase modestly.

What no one knows is what the Fed may say about the likely pace of future rate increases or perhaps about the economy's prospects under the incoming Trump administration. Any answers — or at least hints — could come in a statement the Fed will release, in its updated economic forecasts and in a news conference by Chair Janet Yellen.

Whatever message they send, Fed policymakers will have had much to discuss during their two-day meeting, having not met since President-elect Donald Trump's surprise election victory Nov. 8.

Here are three things to watch for after the Fed's meeting ends:

___

STATE OF THE ECONOMY

The Fed most recently raised its key policy rate last December, after having left it at a record low near zero since the financial crisis erupted seven years earlier. In a statement, it will explain its rate decision and its view of the economy.

So far, the Fed has expressed the belief that still-low inflation gives it leeway to raise rates at a very gradual pace. Investors will be watching to see if it modifies that view.

An especially rosy view, with expectations of a steadily rising job market and inflation edging closer to the Fed's 2 percent target, could suggest a relatively fast pace of future rate increases. A more cautious outlook, by contrast, would signal that the central bank expects to further raise rates only incrementally.

In the arcane world of Fed-speak, seemingly trivial word changes can sometimes have a major impact. Investors will be watching its statement, for example, to see whether the Fed changes its observation that "near-term risks to the economic outlook appear roughly balanced." Just dropping the word "roughly" would be seen as an upgrade of the Fed's economic view — and perhaps a signal that it foresees a relatively quickened pace of rate increases.

___

FORECAST AND DOT PLOT

Each quarter, the 17 members of the Fed's policy committee — five board members (there are two vacancies) and 12 regional bank presidents — offer their own individual, but anonymous, forecasts for the economy's performance. Any significant upgrade Wednesday of those forecasts — for economic growth, the unemployment rate and inflation — could mean the Fed is growing more confident that the economy has strengthened enough to withstand a faster pace of rate hikes.

The current 4.6 percent unemployment rate, a nine-year low, is below the 4.8 percent that Fed officials in September had collectively pegged as full employment. And after an anemic first half of the year, economic growth has accelerated in the second half.

Another gauge to watch is where the 17 officials foresee the path of their benchmark rate, the federal funds rate. Each official's expectation is represented as a dot on the rate chart. Fed officials stress that the chart is merely a projection of where rates might go and is not a pledge of any kind. A year ago, for example, the "dot plot" suggested that the Fed would raise rates four times in 2016. Yet a rate hike Wednesday would be the first this year.

In September, the Fed officials projected one rate hike for 2016 and two each in 2017 and 2018. Some economists are now revising their own forecasts to show three or even four rate increases for next year if Trump succeeds in getting his economic program through Congress and the program begins to accelerate the economy.

Once inaugurated, Trump will have the authority to immediately fill the two vacancies on the Fed's board. Those new officials could have a key role in influencing future rate decisions.

___

YELLEN'S VIEW

After the Fed's announcement, Yellen will take questions from reporters, who will seek details about the Fed's discussions, its economic outlook and its thoughts on the Trump administration. If history is a guide, expect Yellen to be exceedingly cautious in discussing how the Fed may or may not fine-tune its policymaking in response to Trump's plans to slash taxes, ease regulations, speed infrastructure spending — and possibly try to diminish the Fed's independence.

Since Trump's victory, stock markets have rallied, sending stocks to record highs, while bonds have absorbed losses on expectations of higher inflation and interest rates. Investors appear to be betting that the economy will strengthen along with corporate profits. A faster-growing economy could mean more rapid rate hikes from the Fed.

Yellen, though, will likely tread carefully in her assessment of the Trump agenda's likely impact on the economy, in part because the president-elect's agenda could undergo significant revision in its path through Congress.

The Fed chair may be less hesitant to reject Republican proposals in Congress to rein in the Fed's authority and independence. These efforts include a proposal to authorize Congress's auditing arm to review the Fed's rate decisions and require it to establish a formula to use in setting its policies.

Yellen has criticized all those proposals, arguing that restricting the Fed's political independence would be a serious error, with possibly dangerous consequences for the economy.

___

An animated explainer on the Fed's benchmark rate: http://bit.ly/2daPpm5