With Fed rate hike expected, five things to look for
Washington, December 16
A rate increase is finally coming.
That, at least, is the overwhelming expectation for the Federal Reserve today. It would be the first rate hike in nine years. And it would raise the Fed’s key rate from a record low near zero, where it’s been for seven years.
Yet, that won’t be the only news from the Fed.
Here are five things to watch for:
FED’S VIEW OF JOB MARKET
One of the Fed’s dual mandates is to maximise employment. The unemployment rate is at a seven-year low of five per cent, with monthly hiring consistently solid. Strong jobs figures for November were seen as the final seal for a rate increase.
Still, testifying to Congress the day before November jobs report was released, Fed Chair Janet Yellen stressed Fed officials want to see economic growth fuel enough momentum to support additional gains in the job market. Investors will look to see if the Fed spells out what would constitute further gains in hiring to justify more rate increases in 2016.
While the Fed has essentially achieved its employment goal, it hasn’t met its other mandate: To keep prices stable by maintaining an inflation target of two per cent. The problem now isn’t that prices are rising too fast but they’re rising too slowly.
This is problematic because too-low inflation may signal underlying economic weakness. It can also cause consumers to delay purchases and make debt repayments burdensome.
Fed’s key inflation gauge has increased just 0.2 per cent over the 12 months that ended in October. Testifying to Congress this month, Yellen suggested that inflation was being held back by shrunken energy prices and a higher-valued dollar.
Economists will monitor how much confidence the Fed signals about the likelihood of inflation going higher. Conversely, they will look for any word on how a persistently low inflation rate might affect the pace of future rate hikes.
GLOBAL ECONOMIC PRESSURES
Fed had been expected to start raising rates in September. But that was before China roiled global markets last summer with a surprise devaluation of its currency.
The Fed chose to hold off on hiking rates. Minutes of the Fed’s last two meetings show policymakers are monitoring overseas economic weakness and a higher-valued dollar, which has hurt American manufacturers by making their goods more expensive overseas.
Investors will be parsing Yellen’s words about global economic pressures. They’ll also want to see whether she’s concerned about problems that could result from a divergence in policy among central banks.
HINTS OF FUTURE RATE HIKES
If the Fed raises rates today, how explicit might it be about the likely timing of future increases? Yellen is expected to keep the emphasis on a slow and incremental pace for additional hikes. She’s rejected the possibility of returning to the formula the Fed used from 2004 to 2006, when it raised its target for the federal funds rate by a quarter-point at 17 consecutive meetings.
Many economists think the Fed will raise rates only three or four times in 2016. Others think the Fed, if it raises rates today, might wait as late as June before raising them again.
IS THE FED UNIFIED?
At one point, many economists thought a Fed hike in December might draw as many as three dissents in the statement the central bank will release when its meeting ends. Those dissents would presumably come from two board members — Lael Brainard and Daniel Tarullo — and Charles Evans, president of the Fed’s Chicago regional bank. All three are considered ‘doves’, who tend to be more concerned about unemployment than about potential inflation threats.
But now, many economists think Yellen may achieve unanimity, with even the Fed doves backing a rate increase.