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The Federal Reserve is ready to raise short-term interest rates by a quarter of a point after the two-day meeting ends Wednesday, the eighth since the end of 2015. Officials will also present revised inflation projections, employment and growth.
The central bank publishes its policy statement and forecasts – the so-called plot point – at 2 pm EDT. Fed Chairman Jerome Powell asks questions to the media at 2:30 pm Here is a preview of what to look for:
The destination
In June, a slim majority of officials expected the Fed to raise rates four times in total in 2018. The group is expected to grow this week as the Fed raises its key federal funds rate for the third time this year. between 2% and 2.25%.
The biggest question is how next year's rate changes have evolved and how Mr. Powell could characterize the balance of risk at the press conference.
An official camp says that as long as unemployment continues to fall below the expected level, the Fed will have to raise rates to prevent the economy from overheating. This is a non-controversial strategy because it is what the central bank is still doing at this stage of its expansion.
Another side argues for a relatively radical departure from this norm. According to these officials, if inflation does not seem to accelerate beyond 2%, the Fed could stop raising rates after reaching a "neutral" level designed not to stimulate or slow growth.
Mr. Powell did not reveal his preference, but in a speech last month, he seemed sympathetic to treating traditional models with more skepticism than some of his colleagues or his staff.
Fuzzying Up the Forward Guidance
Fed officials debated at their last meeting to find out when it was time to get rid of the wording of their policy statement that rates have been "accommodating" for years, meaning they are weak enough to stimulate growth.
Removing the language later, when rates are much closer to a potentially neutral level, may send a misleading signal about where such a setting is. Mr. Powell has shown that he is wary of the Fed's extreme accuracy over such estimates, which are inherently uncertain.
However, it may be urgent to delete this sentence as rates should remain accommodative after the week's increase. The abandonment of the language may suggest that officials have little need to raise rates. At the same time, Mr. Powell could use his press conference to say that is not the case.
New points
Wednesday's pattern of points will have some new twists. Vice President Richard Clarida will attend his first Fed rate setting meeting and submit screenings. John Williams will contribute for the first time to the screenings as president of the New York Fed, after many years as head of the San Francisco Fed. While the San Francisco Fed has appointed Mary Daly as its new president, she will take office next week, so Mark Gould, the bank's chief operating officer, will represent the regional reserve bank.
The new dot chart will also be the first to present the economy and interest rate projections of public servants in 2021. Certainly this is a long way and the year's forecasts tend to bring little from light.
But the projections for 2021 could clarify a key element of the Fed's policy discourse: how does the central bank intend to direct the unemployment rate towards its so-called natural rate, the level at which inflation does not slow down? does not accelerate? In June, officials expected this rate to be around 4.5%. Unemployment in the United States was 3.9% in August.
Global Divergence
Financial turmoil abroad is the biggest risk for the Fed's plans. Authorities could postpone future rate hikes if a stronger dollar causes emerging markets to disrupt, or if trade tariffs slow down in China, triggering massive sell-offs in global markets.
Watch Powell's concern at the press conference, bearing in mind these potential risks and a related problem, that the Fed exacerbates these turbulence by steadily raising rates, unlike other big banks power stations. Until now, the turmoil in emerging markets has been confined to Argentina and Turkey, whose economies present particular problems. But no law says that crises that begin in vulnerable markets remain confined to these places.
Operating issues
Mr. Powell could face questions about two longer-term decisions that are ripe for debate. July 31 at the Fed At a meeting, officials agreed to launch an important technical discussion this fall on their framework for implementing monetary policy. This is a separate issue from their high or low level, and this could have a significant impact on how long the central bank is reducing its balance sheet of $ 4.2 trillion in bonds and other assets.
At the same time, a growing minority of Fed bank presidents have said they want the Washington-based Fed governors to raise the capital levels absorbing the losses that large private banks must lift, using a rule known as name of "countercyclical buffer". Mr. Powell did not express a strong opinion on the issue.
Write to Nick Timiraos at [email protected]
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