US Fed decision awaited for clues on interest rate path

Washington (AFP) –


The Federal Reserve is not expected to change interest rates on Wednesday, but the policy statement will be searched for any hints of how aggressively it plans to address incipient inflation.

After raising the benchmark lending rate in March, the Fed was on track for two more increases, but with prices and wages finally showing signs of rising, markets have become jittery about the prospects of a fourth increase this year.

Futures markets on Tuesday afternoon gave about a 50 percent chance the Fed would raise rates in June, September and December.

And the chances also have increased for the Fed to make four increases in 2019, rather than the three previously expected.

"The big question is what happens next year and from what I can tell, the market's only pricing in maybe one more rate hike for next year," said Kathy Bostjancic of Oxford Economics.

Recent economic statistics offer increasing reason to believe policymakers may feel compelled to move less gradually.

The Fed's preferred inflation gauge, the personal consumption expenditures (PCE) price index, hit the central bank's two percent annual target last month for the first time in a year.

And a monthly survey of the manufacturing sector showed prices paid at a seven-year high, spurred by steel and aluminum tariffs the US imposed in March.

Inflation ran ice cold in 2017 despite falling unemployment and steady job creation, baffling economists and the central bank.

But analysts say 2018 is likely to be the year a convergence of factors -- a weak dollar, recovering oil prices, synchronous growth among major economies and trade worries -- finally combine with the tight labor market to light a fire under price pressures.

The Fed announces its decision at 2:00 pm (1800 GMT), and while markets will hang on every nuance of the policy statement, some economist say it may be very cautious and give away little.

"The Fed will do nothing and say little that's new after its meeting today," said Ian Shepherdson of Pantheon Macroeconomics.

And it may be too early to sound the alarm: inflation hit two percent early last year as well, but then retreated.

Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, told AFP he expected inflation to exceed Fed targets unambiguously by year's end.

"I think they'll do their hikes in March, June and September and when December comes around they will say, 'we need to hike,'" he said.

"The real risk is that they might have to react to more inflation next year at some point or the year after and they have to cause a recession basically to stop the inflation."