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WASHINGTON – Wednesday is Fed Day, which means the Federal Reserve's Open Market Commission, which sets monetary policy, will issue a policy statement at 2 pm after a two-day meeting.
■ Investors expect the Fed to raise its key rate by 2% to 2.25%, its third increase in 2018.
■ The Fed should also strengthen its expectations of a rate hike in December.
■ Key issues are the Fed's 2019 projects. A new round of economic projections from committee members will provide insights into the central bank's trajectory.
The big picture
The Federal Reserve warned last year that the economy, which was buzzing, did not need a major tax cut. Congress went ahead and cut taxes anyway. The Fed reacts, as promised, by raising rates to avoid overheating.
Inflation is just where the Fed wants it, at an annual rate of 2%. Unemployment is low and Fed officials are increasingly afraid of low interest rates.
"The Fed has some catching up to do," said Jan Hatzius, chief economist at Goldman Sachs.
Investors are so convinced that the Fed will raise rates as the price increase has already entered the markets.
Investors also have a high probability for a fifth consecutive quarterly increase in December. Fed Chairman Jerome H. Powell will have the opportunity to calibrate his expectations at a press conference on Wednesday afternoon after the release of the Fed statement.
Back to normal?
As it rises, the Fed's benchmark rate moves closer to a neutral level, which means that, in the view of Fed officials, this would neither stimulate nor discourage economic activity. Reaching this level would be an important step in the recovery of the country after the 2008 financial crisis.
The Fed's statements have described the level of interest rates as "accommodating". According to the minutes of the last meeting of the Fed in late July and early August, "many participants" thought the future not too far "to reflect the imminence of neutrality.
This moment could arrive on Wednesday. But the end of housing does not mean the end of rate increases. Officials expect the neutral level to increase as the economy grows. The latest round of economic projections in June forecast a neutral level of 2.9%.
And most Fed officials hope to raise their rates above this level. Lael Brainard, a Fed governor, said this month that the Trump administration's efforts to stimulate the economy will likely require higher rates. "Over the next two years, unless unexpected developments, the gradual increases in the federal funds rate will likely be appropriate," Ms. Brainard said.
On the horizon
The current rate hike cycle may have already exceeded its midpoint. The Fed has raised its rates seven times since the financial crisis. In addition to the probable rate hikes on Wednesday and December, Fed officials have forecast three interest rate hikes in June in 2019 and another in 2020. That's six in perspective.
On Wednesday, the Fed will release its first forecasts for 2021. Will this show additional increases?
It should be noted that if the economy continues to grow in 2021, it will be by far the longest economic expansion in US history. Fed officials and other economists said that they saw few obvious signs of economic stress on the horizon and that expansions do not die in old age. But they die.
The widening interest rate gap in the United States and the rest of the developed world is a risk that is receiving increased attention, which could lead to disruptive capital flows across borders, investors looking for higher rates. Another is the trade war between the United States and China.
Upcoming Attractions
The next meeting of the Fed's steering committee is scheduled for November 7 and 8, but nothing will likely happen in November, as the Fed has changed policy only at the four meetings each year, accompanied by a new one. conference with the president of the Fed.
To update the convention, Powell will hold press conferences after each of the eight meetings scheduled by the Fed in 2019. The November meeting will be the last without a press conference.
Follow Binyamin Appelbaum on Twitter @bcappelbaum
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