Federal Reserve set to raise rates as Powell era begins

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The Federal Reserve was set to begin its two-day policy meeting Tuesday which is expected to produce the first of at least three increases in the key interest rate this year.

 

With economic forces gathering that are likely to fuel inflation in 2018, the central bank could raise the benchmark lending rate four times to prevent the world’s largest economy from overheating after a decade of recovery.

That prospect has investors on edge as stock prices remain at dizzying heights.

Newly-installed Federal Reserve Chairman Jerome Powell will hold his first press conference at the conclusion of the meeting Wednesday, after being sworn in last month and his words will be closely scrutinized for hints about the likely pace of rate hikes.

The Fed also will update its forecasts for the economy and how aggressively officials think the central bank will have to act in coming years.

“The members will be looking at a variety of factors, but they can be summarized simply: Is growth strong and is inflation moving back toward its target?” economist Joel Naroff wrote in a client note.

“The answer on both accounts seems to be yes.”

Since the Fed last met in January, economic data have been mixed and forecasts for economic growth in the first quarter have dimmed.

Weak data on retail and auto sales, durable goods orders and the housing market as well as soft construction spending and a widening trade deficit have disappointed in recent weeks.

Headwinds now tailwinds
As a result, forecasters at Morgan Stanley, JP Morgan Chase and the Atlanta Federal Reserve Bank lowered their estimates for GDP growth in the first three months of the year to under two percent — well below President Donald Trump’s goal of three percent a year or higher.

First quarters generally run below trend, however, and the economy looks set to resume its healthy expansion later in the year.

Surveys of the manufacturing and services sectors show a strong head of steam, while consumer confidence and business sentiment are at record highs.

Job creation also soared in February, one of the best months of the current economic recovery, with 313,000 new positions added while unemployment remains at a historically-low 4.1 percent.

Inflation, while still tame, also seems to be poised to rise, with the Consumer Price Index gaining 2.5 percent over the last six months.

In remarks earlier this month, Fed Governor Lael Brainard, long one of the most dovish US central bankers, said times were changing, and inflation was a growing concern.

“In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy,” she said.

“Today, with headwinds shifting to tailwinds, the reverse could be true.”

Looming on the horizon, however, is the possibility of a trade war, as Trump has launched an aggressive campaign against many imports, including the controversial steep tariffs on steel and aluminum, sparking fears of tit-for-tat retaliations and a spike in prices.

Tim Duy, an economist at the University of Oregon and a close Fed watcher, said the central bank would likely steer clear of directly addressing trade matters.

“There is nothing for certain yet about a trade war,” he told AFP.