Here we go again! Interest rates, interest rates, interest rates. The biggest source of speculation at a Fed meeting - whether or not the board will decide to raise interest rates, which it has done only once since 2006 - is all but a foregone conclusion this time. The bigger question is what the Fed will do in 2017, and how that will impact the markets, policymakers and ordinary investors under a Trump administration. “There’s less uncertainty that usual about this decision,” said Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.
The more Trump’s administration stimulates growth, with his promises to cut taxes and regulation and to increase spending on infrastructure and defense, the faster the Fed is likely to increase rates. A rallying stock market, rising bond yields and the return of inflationary pressures are creating new challenges for the Fed as it started its two-day policy meeting yesterday. The Fed is widely expected by investors to decide at the meeting to raise rates by a quarter percentage point to a range between 0.50% and 0.75%.
The outlook has shifted since the last time Fed officials issued economic forecasts in September. That time, they cut their outlook for growth and inflation this year, and predicted slightly higher unemployment by the end of 2016. The unemployment rate has since fallen to 4.6% - the lowest level since 2007 - and economic growth has accelerated in the third quarter.
“I guess I would argue that I think people have gotten a bit ahead of themselves about what a Trump presidency would mean,” said Lewis Alexander, chief United States economist at Nomura. “If we have a big stimulus, the logical thing for the Fed to do is raise rates faster. There isn’t a whole heck of a lot of scope to just let the economy run under those circumstances. There’s a big question about whether fiscal stimulus under Trump just leads to higher interest rates.”
Economists surveyed by The Wall Street Journal last week expected four quarter-percentage-point rate increases between now and the end of 2017. Some cited rising inflation, while others said Trump’s tax and spending plans might boost price pressures or saw Trump’s potential Fed nominees advocating a more hawkish path for interest rates.
But bank officials have made clear in recent public comments they will wait to see how policies develop under Mr. Trump and a Republican-controlled Congress before the Fed rethinks policy. That means their median expectation for two quarter-percentage-point rate increases in 2017, and three each in 2018 and 2019, is unlikely to change much this week.
Keep those stops tight!
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