The Fed should raise rates, perhaps end the "accommodative" political era

WASHINGTON (Reuters) – Financial markets are questioning whether signs of accelerating US economic growth should prompt the central bank to accelerate the tightening of monetary policy.

The two-day political meeting this week could mark the formal end of the "accommodative" rate that the Fed has used to support the US economy since the start of the 2007-2009 recession.

The Fed's current policy statement has included this description of bulk policy as a building block in recent years, although officials have recently described it as out of date and likely to be removed, either this week or in the past. a near future.

The likelihood that the Fed will raise its key overnight funding rate by one-quarter of a point on Wednesday, its third increase this year, is nearly 95%, according to an analysis of fund-raised futures contracts. the CME group.

The biggest question is whether the Fed is reshaping its monetary policy outlook for the next few years in order to account for stronger GDP growth or whether fears of a possible global trade war or of a economic slowdown bring it closer to its current vision.

Gross domestic product grew faster than the Fed forecast, reaching an annualized rate of 4.2% in the second quarter, according to data from the US Department of Commerce released last month.

On Wednesday, the Commerce Department announced that sales of new single-family homes rose 3.5% in August, a larger increase than predicted by economists in a Reuters poll after two consecutive monthly declines.

Some analysts expect a more aggressive reaction from the Fed, whether or not it comes from the policy statement to be issued at 14 hours. EDT (1800 GMT), economic and interest rate projections provided by policymakers, or Fed Chairman Jerome Powell's press conference after the meeting.

"Financial markets should prepare for a more hawkish tone," wrote Natixis economists Joseph Lavorgna and Thomas Julien before the meeting.

"Another quarter of real GDP growth of 4%, coupled with faster wage gains, will likely make policy makers take an aggressive stance at one point or another … Investors will soon have to face at the pressure exuberant economic activity. "

RISK MANAGEMENT

In its latest round of economic projections in June, the Fed predicted the economy would grow 2.8 percent this year, a figure that several central bank officials have since publicly raised.

The unemployment rate, currently 3.9%, is beyond what can be maintained without putting upward pressure on wages and inflation, and consumer confidence is at its highest since years.

In addition, stock markets have largely discounted the risk of the economy derailing a global trade war. US equity markets edged higher on Wednesday as Treasury yields fell and the .DXY dollar was stronger against a basket of currencies.

Some Fed policy makers said they thought the US wage hike was only the first of the next.

Powell, who took the helm of the Fed earlier this year, focused on risk management in a way that indicates he is paying more attention to a possible rise in inflation than trying to lowering unemployment rates.

Investment bank Goldman Sachs predicts that the Fed will raise rates four times in 2019, faster than the three increases suggested by policymakers in their projections in June or the two to three increases planned by investors.

The Fed's overnight credit policy rate is currently in the target range of 1.75% to 2.00%.

"Given the impressive growth dynamics of the economy, upward trends in wages and price inflation and the overall tight tightening of financial conditions achieved so far, we believe that the risks on the funds rate are on the rise, "said Goldman Sachs. Economists Jan Hatzius and others have written in preview of the Fed meeting this week.