The Fed is expected to raise interest rates by a quarter point Wednesday and indicate it plans to keep hiking them in what many expect to be a hawkish message for markets.
Central bankers are gathering under a long shadow cast by President Donald Trump, who has attacked the Fed’s plans for continued rate hikes, which he says counteract the benefits of recent tax cuts and economic growth, and ratcheted up an unprecedented trade war with China.
At their meeting last month, policymakers said another rate hike was likely to be appropriate “soon,” all but announcing their intentions to raise rates by another 25 basis points on Wednesday.
Wall Street economists expect the Fed to make a number of changes that reinforces a hawkish tone, including raising its growth forecasts, dropping language that says its policy is accommodative and sounding more confident about the outlook.
A higher longer term growth rate is both hawkish and bullish. It means the Fed is also likely to raise its near term forecasts, but it also means it sees a sustainable higher pace of growth for the economy, implying higher corporate earnings growth.
Fed officials also will update their quarterly forecasts for inflation and interest rates, among other closely watched metrics.
Since the Fed’s last meeting, job creation and GDP numbers have shown robust health, wages have risen and inflation has firmed, while measures of industrial activity and the housing market are among the few that have softened.
John Williams, a long-time central banker and the newly installed president of the New York Federal Reserve Bank, earlier this month said the United States was experiencing a “goldilocks economy,” meaning the Fed only needed to raise rates gradually.
But analysts say the central bank is tangling with a complex set of near-term questions – a China trade battle affecting hundreds of billions of dollars in goods that is likely to be inflationary; tax cuts and fiscal stimulus late in the economic recovery; and dizzyingly high asset prices alongside more or less stagnant wage growth despite historically low unemployment.
“They are going to raise rates in September and probably going to give the signal that they going to raise rates in December,” David Wessel of the Brookings Institution, told AFP.
“Where it gets interesting, and there is a lot of uncertainty, is what happens after that.”
The Fed is working to get things “just right so you don’t overheat but you don’t cause a recession,” he said.
Unfortunately, “It’s very hard and there is not much history of having pulled that off.”