WASHINGTON /December 13, 2017 (AP)(STL.NEWS) — On the day when Janet Yellen will hold her final news conference as Federal Reserve chair, the Fed has left little doubt what it plans to do Wednesday: Raise its benchmark interest Rate for the third time this year.
The increase would be in line with the series of incremental rate hikes the Fed has been making to keep up with a steadily rising U.S. Economy. Over time, the rate increases could mean somewhat more expensive business and consumer loans, including mortgages.
But investors have barely blinked at the prospect of higher rates. The financial markets appear confident that the economy remains vigorous enough to withstand slightly higher borrowing costs.
It’s a testament to how far the economy has come: In the midst of the 2008 financial crisis, the Fed slashed its key rate to a record low near zero — and then kept it there for seven years to support a fragile economy that had endured the Great Recession. The central bank finally raised rates modestly in December 2015 and then again in December 2016 and in March and June this year. Even so, the benchmark rate remains in a still-low range of 1 percent to 1.25 percent.
Investors seeking clues about what the Fed may do in the coming months will scrutinize its updated economic outlook Wednesday and assess Yellen’s remarks in her last meeting with reporters before Jerome Powell succeeds her in February.
Here are three things to watch for after the Fed’s meeting ends:
STATE OF THE ECONOMY
The Fed will update its economic outlook, which it does four times a year. The outlook includes its projections for Inflation, unemployment, economic growth and the path of rate increases. Since the Fed’s last update in September, Congress has moved to the edge of passing a tax bill that could have far-reaching consequences. Some analysts say the tax cuts could slightly raise economic growth but also swell federal deficits, which might eventually compel government spending cuts.
Analysts will be watching to see whether the prospect of an economic stimulus, in the form of $1.5 trillion in tax reductions over a decade, leads the Fed to cast a brighter outlook for the economy. If so, that, in turn, could make it likelier that the Fed would decide at some point to accelerate its rate increases.
In September, the Fed projected economic growth, as measured by the gross domestic product, at 2.4 percent this year but then slowing over the next three years until reaching 1.8 percent growth in 2020. That’s far below the expectations of Trump, who has boasted that his economic program would double the lackluster 2 percent average growth during the Obama years to 4 percent annual GDP growth or better.
The Fed’s forecast in September had estimated that unemployment would be 4.3 percent at year’s end. The rate has already reached a 17-year low of 4.1 percent. The Fed also put its long-term unemployment rate — the level it sees as achieving its goal of maximum employment — at 4.6 percent. If the Fed lowers that figure, it could suggest that the policymakers are willing to accept lower unemployment without worrying about inflation.
Likewise, the Fed target for average annual inflation is 2 percent. Yet inflation has remained below that level for more than five years. Fed officials have blamed temporary factors for the slowdown. But analysts will watch to see whether the Fed reduces its inflation forecast or still projects that it can achieve its 2 percent target.
The Fed will issue a diagram showing where each official expects to see the path of interest rates in coming years. These forecasts appear as dots representing the anonymous projections of each Fed policymaker. Analysts study any shifts in the so-called dot plot for signals about the Fed’s likely rate plans.
Powell stressed during his confirmation hearing that he planned to continue Yellen’s gradual approach to raising rates. Many economists expect the Powell Fed to raise rates three more times in 2018. But some predict four hikes next year on the belief that the Fed will feel compelled to accelerate its rate increases to prevent the economy, fueled by Republican tax cuts, from triggering high inflation.
The Fed will hold one more policy meeting before Yellen’s four-year term ends Feb. 3, but Wednesday will mark her final quarterly news conference as chair. Yellen has also said that she will give up her board seat once Powell is confirmed by the Senate as the next chairman.
Still, she will likely face a flurry of questions from reporters trying to determine how the Fed might respond to chronically slow inflation in 2018. Fed officials have spent much of 2017 debating what the puzzling slowdown in inflation might be signifying about the economy. Yellen is certain to be asked about that debate.
Yellen, the first woman to lead the nation’s central bank, will likely face questions about Trump’s decision to break with a long tradition of offering a sitting Fed chairman a second four-year term. Trump chose Powell rather than renominate Yellen — as a way, he acknowledged, to put his own stamp on the Fed.
At her final news conference, many Fed watchers say it’s unlikely that Yellen will deviate from her typically cautious demeanor, in part out of concern that in speaking her mind, she might jeopardize what she is hoping will be a smooth handover to Powell.
By MARTIN CRUTSINGER, AP Economics Writer ,By Associated Press, published on STL.NEWS by St. Louis Media, LLC (AS)
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