Fed to Hold Rates Steady and Brace for Trump

Commodity

Central Bank

Summary:

The Fed´s rate decision will be released at 2 p.m. in Washington on Wednesday and Fed Chair Jerome Powell will hold a post-meeting press conference 30 minutes later.

Federal Reserve officials are expected to leave interest rates steady this week, giving themselves more time to lower inflation, the break in rate cuts would come after three straight reductions since September that lowered the Fed’s benchmark rate by a full percentage point. Their target range is now 4.25% to 4.5%.

Several policymakers have said they expect fewer rate reductions this year following data showing the US economy is on sturdy ground and that inflation has been stickier than anticipated. December data for the Fed’s preferred inflation gauge, the personal consumption expenditures price index, is due Friday.

Still, after a string of surprising data and uncertainty over how the US economy might respond to an array of bold new policies from Trump on trade, taxation, immigration and regulation, officials are unlikely to commit to any particular rate path.

“They’re skipping a rate cut,” said Gregory Daco, chief economist for EY. “But they want to retain as much optionality as possible to adjust the fed funds rate further through the year.”

The Fed’s rate decision will be released at 2 p.m. in Washington on Wednesday and Fed Chair Jerome Powell will hold a post-meeting press conference 30 minutes later. Fed to Hold Rates Steady and Brace for Trump_1

Fed to Hold Rates Steady and Brace for Trump_1

Future Adjustments

Fed watchers don’t expect the Federal Open Market Committee to make many changes to their post-meeting statement. The current wording referring to the “extent and timing of additional adjustments” already gives policymakers flexibility to change their approach, as needed, based on what happens with the economy, said Daco.

Powell will almost certainly be pressed by reporters over how he and his colleagues are factoring Trump’s policies and proposed plans into their outlooks for the economy. Fed officials are not due to release updated forecasts until their March policy meeting.

But minutes from the December gathering showed “a number” of participants included placeholder assumptions about Trump’s potential plans in their economic projections and “almost all participants” said the upside risks to inflation had increased.

According to Daco, investors also want to hear more from Powell on the so-called “neutral rate,” or the level at which the Fed is neither juicing nor cooling the economy. Officials have been raising their estimates for neutral over the past year. If many policymakers believe interest rates are near that point, it suggests not only a slower pace of reductions ahead, but fewer total cuts as well.

Reporters will likely ask the Fed chief for more clarity on what officials will need to see before they lower rates again, and, conversely, what could force them to consider a rate increase. After a blockbuster December jobs report, economists at Bank of America Corp. said they believed the central bank’s next move might be a hike.

Such worries eased, however, after a key gauge of consumer prices — which excludes food and energy — rose by less than expected in December, marking the first step down in six months. Policymakers welcomed the report but said they still have more work to do to get inflation down to their 2% target.

Political Pressure

Powell may also be asked to respond to Trump’s latest jabs at the central bank.

“I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision,” Trump said Jan. 23, in an apparent reference to Powell.

Powell has in the past deflected or ignored Trump’s comments on monetary policy but the remarks, coming in Trump’s first week back in office, suggest the Fed chief could face more pressure than ever before from the new administration.

“The Fed will likely have to deal with Trump’s efforts to influence monetary policy, both through appointments and potentially through other efforts to exert more sway on the institution,” Michael Feroli, chief US economist for JPMorgan Chase & Co., wrote in an email note Friday. He predicted this week’s meeting will be “a boring start to a tumultuous year for the Fed.”

Source: Bloomberg

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