The Fed will probably keep its rates unchanged and outline good prospects

WASHINGTON – With the economy strong, wages rising and unemployment at its lowest level in almost five years, the Federal Reserve remains on track to continue raising interest rates, but not this week.

After the Fed's last policy meeting, the Fed is expected to announce a healthy outlook for the economy, but not wait for a new credit crunch, likely until December. A rate hike in December would mark the fourth this year.

Further rate increases are expected in 2019, although their numbers are subject to speculation. On the eve of mid-term congressional elections, the US economy remains strong, even in its tenth year of expansion – the second-longest of its kind ever recorded.

In deciding how fast or how slow the rate hike will be, the Fed will monitor the pace of growth, the strength of the labor market, and inflation indicators to better understand how the economy is going in the months to come. to come up. The steady pace of economic growth – an annual rate of 3.5% for the quarters of July to September, after a rate of 4.2% in the previous quarter – has increased the risk of accelerating the pace of growth. inflation.

In its latest forecast, the Fed planned to raise rates three more times in 2019. Some economists, however, provide only two increases. Others are expecting economic growth to remain strong and the job market strong and that the Fed is deciding that four rate increases will be warranted next year to guard against high inflation. At 3.7%, the unemployment rate is already at its lowest level since 1969.

"The Fed will have to continue raising rates next year as the unemployment rate will continue to fall to almost 3%, well beyond full employment," said Mark Zandi, chief economist at Moody's Analytics. "There are only green lights for more rate hikes all the way ahead."

On Friday, the government announced that the economy had created 250,000 jobs in October and that the average wage had risen by 3.1% over the previous 12 months – the largest increase in a year in the world. Another in almost 10 years. This is good news for the workers. But this is a trend that could raise fears that the acceleration of wages will contribute to fueling inflation that is too high.

President Jerome Powell pointed out that the Fed was determined to take a medium-term approach: continue to gradually push rates to control inflation, but avoid tightening too aggressively and eventually triggering a recession.

"They're walking a tightrope," said Diane Swonk, chief economist at Grant Thornton.

The Fed has raised rates three times this year, raising its key rate to a range of 2 to 2.25%, which is still low by historical standards. Most economists believe that the statement the Fed will release on Thursday after the close of its political meeting will raise another imminent increase, likely in December.

Fed policymakers have pointed out, and most economists agree, that this slight increase of a quarter of a point is equivalent to a gradual tightening of credit. But President Trump has expressed his deep disagreement, and since the stock market began to tumble last month, he has tackled the Fed's rate hike and Powell's leadership. Trump's public criticism has raised concerns that it would impinge on the long-standing and respected political independence of the central bank and the need to operate at a cost free external pressure.

At the same time, the concern of equity investors reflects the fact that the steady rise of the Fed towards rate hikes eliminates a key factor that has underpinned the bull market for equities: richer returns than could get equity investors who are in bonds or savings accounts. .

The Fed's critics claimed that the central bank was creating a securities bubble that would eventually appear with disastrous results. Trump, who has often cited high stock prices as proof of the success of his economic policies, has clearly expressed his disagreement. He called the Fed, with its series of rate hikes, "my biggest threat."

Powell, who was chosen by Trump to lead the Fed, avoided reacting directly. The President has instead expressed his determination to continue the Fed's mandate of maximizing employment and stabilizing prices without regard to political considerations.

To this end, Swonk, like Zandi, suggests that the Fed will raise rates four times next year because it thinks the economy will only slow down slightly. Other analysts predict a further slowdown as Trump's tariffs on many imports begin to weigh on growth.

"The economic outlook will not strengthen next year; it will weaken, not only in the United States, but also in the world, "said Sung Won Sohn, chief economist at SS Economics.

Sohn said he thought the Fed might decide to tighten its credit only once or twice in 2019.

David Jones, author of books on the Fed, think that after December, the central bank will raise rates twice more in 2019 and then stop. Jones said his forecast was based on his belief that the Fed would not want to raise rates above what it considers the "neutral" level. It is at this point that we think that the key rate of the Fed does not stimulate or slow the economy.

The median evaluation of Fed officials has set the neutral rate at 3%. A further rate increase this year and two more in 2019 would leave the Fed's key rate between 2.75% and 3%.

"I think Powell is determined to become neutral and then see how the economy behaves," Jones said.

Martin Crutsinger is an Associated Press writer.