Washington - The Federal Reserve
inaugurates the Trump era this week with a near-certain interest
rate increase and new economic forecasts providing a first
glimpse into whether the US election has reshaped the central
bank's growth and inflation outlook.
Fed fund futures show a 97 percent probability that the Fed
will lift rates by a quarter of a percentage point at the end of
its two-day policy meeting on Wednesday, according to the CME
Group.
All 120 economists in a Reuters poll expect a rate hike in
the wake of a string of solid U.S. economic reports.
More telling will be whether the stock market rally and jump
in bond yields triggered by Trump's Nov. 8 victory will push the
Fed to an inflection point of its own and a higher projected
pace of rate increases for 2017 and beyond.
The Republican businessman is inheriting a good economy, one
that grew by 3.2 percent in the third quarter, the fastest pace
in two years. There are, however, concerns that his plan to
reduce taxes, cut regulation and increase infrastructure
spending could not just boost the economy but also fuel higher
inflation.
Since first published in 2012, the Fed's quarterly "dot
plot" of projected interest rates has generally moved in one
direction - down - and any post-election change will show
whether policymakers expect Trump's policies to shake things up.
As of September, Fed officials' median projection was for
two rate increases next year and a long run "neutral" level of
2.6 percent. A rate increase this week would be the first since
last December and only the second since the 2007-2009 financial
crisis.
"Their path is going to move up faster and a little sooner,"
said Steve Rick, chief economist for CUNA Mutual Group. He said
the economy was running at its potential, and that was the Fed's
cue to "exit stage right" and steadily move rates to normal.
Fed officials have long hoped that other government policies
would take the place of monetary engineering, which some believe
may have lost its effectiveness in lifting economic growth.
They have warned in recent weeks that any new government
spending should specifically be designed to boost productivity
in an economy that is already near full employment and facing a
high public debt burden.
The Fed's new forecasts will indicate if policymakers feel
that the monetary-to-fiscal handover is on the horizon, or need
more time for the Trump administration's plans to become more
detailed and move through Congress.
Fed Chair Janet Yellen is scheduled to hold a press
conference at 2:30 p.m. (1930 GMT) on Wednesday to elaborate on
the economic outlook and policy statement.
She'll have a broad set of issues to cover since her last
press conference in September - from the Federal Open Market
Committee meeting itself, to the likelihood she will be replaced
in early 2018 and the risks she foresees from the Trump agenda.
Trump repeatedly attacked Yellen during the election
campaign, accusing her of holding down rates to help his
Democratic rival. Since the election, he has expressed his
disapproval of corporate America, criticizing Boeing, and
took credit for a deal to keep hundreds of jobs at an Indiana
plant from being moved to Mexico.
The president-elect also will be under scrutiny after this
week's Fed meeting for clues about how he plans to handle his
relationship with the central bank.
Read also: Fed holds rates steady
"There is a real risk that he could be openly critical of
the decision to raise rates next week," Paul Ashworth, an
economist with Capital Economics, said in a note last week.
That could upset markets and raise serious issues about
whether Trump intends to leave the Fed alone or try to influence
its decisions. Top U.S. elected officials, in particular the
president, typically avoid criticizing the Fed's short-term rate
decisions, emphasizing instead the need for monetary policy to
be set independently.
"If he remains silent after the announcement to raise
interest rates next Wednesday, then we can begin to assume that
it will be business as usual for the Fed," Ashworth wrote.
Watching the markets
Trump's plan to cut taxes and regulation and funnel fresh
billions into capital projects must pass Congress, and it may be
well after that before any new programs meaningfully effect
economic forecasts.
But policymakers also watch the markets closely. It may be
hard for the Fed to stick with its ultra-slow pace of rate hikes
if a major tax overhaul and fiscal spending plan are unleashed.
TD Securities analysts said that fiscal policy at this point
in the economic recovery could prompt "an inflationary demand
shock" that adds nearly a percentage point to economic growth,
but spurs the Fed to raise rates much quicker than expected - by
nearly an extra percentage point per year.
That scenario of a central bank caught behind the curve and
forced to act faster is one that Yellen and other policymakers
have said they hope to avoid out of fear it could prompt a
recession.
Fed officials in recent days have acknowledged the Trump
agenda may cause them to switch gears, though it is not clear
how soon.
"At this juncture, it is premature to reach firm
conclusions," New York Fed President William Dudley said last
week.
But, since Trump won the election, Dudley added, "the stock
market has firmed, bond yields have risen and the dollar has
appreciated ... Market participants now anticipate that fiscal
policy will turn more expansionary and that the (FOMC) will
likely respond by tightening monetary policy a bit more quickly
than previously anticipated."