- Reuters/Joshua Roberts
- With markets fully pricing in another Federal Reserve interest-rate rise at this week’s meeting, all eyes will be on the central bank’s hints into the pace and quantity of future hikes.
- Fed Chairman Jerome Powell will need to answer the key question of whether recent trade tensions, combined with economic turbulence ranging from Europe to emerging markets, have dimmed the Fed’s domestic outlook.
- Powell is likely to remain optimistic but noncommittal regarding the pace of hikes beyond September.
One key question is facing Federal Reserve Chairman Jerome Powell.
Has the Fed’s optimism about future economic growth, predicated in part on some expected fiscal boost from this year’s tax cuts, waned in the face of rising global trade tensions and emerging-market turbulence?
Pretty much all of Wall Street is forecasting another interest-rate increase this week after the US jobless rate fell to an 18-year low of 3.8%.
But what really matters for investors now is the likely pace and quantity of rate hikes beyond Wednesday’s announcement – which is expected to take the federal funds target range up by a quarter percentage point to between 1.75% and 2.0%.
The latest economic data shows inflation picking up in line with the recent spike in oil prices but workers’ wages still failing to keep up.
Markets are especially fixated on whether the Fed will raise rates a fourth time at the end of the year or hold off on additional increases until 2019.
The messaging is everything, and that includes the Fed’s postmeeting statement, the central bank’s new round of economic and rate forecasts, and Powell’s quarterly press conference.
Chances are Powell will stick to an optimistic script, downplaying trade concerns as too early to have a concrete economic impact, as he did in recent congressional testimony.
Another key concern for investors is the Fed’s “terminal rate” – where policymakers believe the federal funds rate will end up. All indications are that the expected “neutral rate,” one that neither boosts nor retards economic growth, has fallen since the Great Recession. The median projection for that longer-run rate is now 2.9%.
In assessing the Fed’s outlook for the longer-run federal funds rate, Wall Street economists are focused on language in the policy statement that says the rate “is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
One Fed governor, Lael Brainard, suggested this language was “stale” in a recent speech. Investors are quite curious as to whether Powell will want to echo such remarks in advance of a change or be willing to execute it as early as this meeting.
“Her argument looks reasonable and suggests some sense of urgency to revise the language,” the economist Lewis Alexander and his colleagues at Nomura wrote in a research note. “Against this backdrop, we expect that the Committee will likely drop this forward guidance sentence from the statement without a replacement, consistent with the trend after Chair Powell was sworn in to simplify the Fed’s communication.”
Moreover, they add, the Fed will have to account for a visible deterioration of the outlook for growth overseas.
Brainard “acknowledged that ‘recent developments abroad suggest some risk to the downside,’ indicating that Powell’s language at the March press conference that ‘foreign growth is on a firm trajectory,’ will likely be updated,” the Nomura economists concluded.