3 things to watch for from the Federal Reserve on Wednesday
WASHINGTON (AP) — Not quite yet.
That’s the decision the Federal Reserve is expected to deliver Wednesday when it announces to the financial world whether it will resume raising interest rates now — or wait until later, perhaps sometime soon.
Most economists say they think the Fed wants more time to evaluate the U.S. economy, measure the risks emanating from abroad and assess whether inflation will soon reach the policymakers’ 2 percent target rate. In the end, most Fed watchers think the next rate increase won’t come before December.
But no one knows for sure. The biggest question Wednesday is whether the Fed will hint at when it will next raise its key short-term rate — and, if so, how explicitly it will do so.
The answer — or at least the perceived answer — could come from the triple-dose of news the central bank will issue: A policy statement, updated economic forecasts and a news conference by Chair Janet Yellen.
Here are three things to watch for:
HINTS OF A COMING HIKE?
The Fed raised its key policy rate in December after leaving it at a record low near zero for seven years to help support a struggling economy. No further rate hikes have followed. For months, Fed watchers had speculated that the policymakers were preparing investors for a September rate increase. But that likelihood has faded as recent economic reports have turned out weaker than expected.
The betting is that there will be no rate hike now but that the Fed’s statement will hint that a December increase is likely by sounding a more optimistic note about the economy. At their most recent policy meeting in late July, the Fed’s policymakers noted that near-term risks to the economy had diminished.
If that language is strengthened — perhaps by noting, in Fed parlance, that the risks to the Fed’s economic outlook appear “balanced” — that would be read as a signal that a rate hike could be coming soon.
Based on history, the Fed wants to prepare investors for a forthcoming rate increase and avoid having a small rate hike trigger a stock market plunge. Last year, at the meeting that preceded its move to raise rates in December, the Fed had said it would consider whether an increase would be appropriate at its next meeting. It was the first time the central bank had been so explicit in hinting when a rate hike might occur.
A DIMMER ECONOMIC VIEW?
The Fed will update its quarterly economic forecasts Wednesday. Look to see whether it bows to signs of sluggish expansion by forecasting that the economy will fail to grow even 2 percent this year. In its previous forecast in June, the Fed had downgraded its expectations for 2016 growth from 2.2 percent to 2 percent.
In June, the Fed had forecast that the unemployment rate would fall to 4.7 percent by the October-December quarter. It might pull back that assessment given that the jobless rate has remained 4.9 percent for three straight months. (More people have begun looking for work and haven’t immediately found it, and their influx has raised the number of people counted as unemployed.)
Another hint of the Fed’s thinking could come from any revamping of its inflation forecast. Does it foresee inflation rising meaningfully toward its 2 percent target? Inflation has remained stubbornly below that level for four years — a key factor in the Fed’s reluctance to resume raising interest rates.
The Fed has said repeatedly that it expects inflation to rise to 2 percent within a couple of years as the effects of falling oil prices and a stronger dollar fade. In June, it said it expected to achieve its 2 percent inflation target in 2018. Look to see whether the central bank scales back that expectation. If it does, it might suggest no rate hike for a while.
THE DOT PLOT
The uncertainty swirling around the Fed isn’t just about when it will next raise its benchmark interest rate. It’s also about how fast it will continue to act once it resumes its rate increases. Look to the Fed’s signature “dot plot” to see where its 17 policymakers envision rates in the coming months and years.
Back in December, when it raised its benchmark rate for the first time in seven years, Fed officials had indicated the likelihood of four additional modest increases in 2016. But in March, the Fed scaled back that forecast to just two increases this year. On Wednesday, the dot plot could be revised further to a forecast of just one rate hike during 2016, if, as expected, the Fed doesn’t act this week.
Two more meetings will be held in 2016 — in early November and mid-December. The November meeting is expected to be off-limits for a hike given that it will be just one week before the elections.
The Fed could lift spirits on Wall Street by projecting an even more gradual pace for future rate hikes. In June, Fed officials projected three increases in both 2017 and 2018 — a pace that would lift the benchmark rate to 2.4 percent by the end of 2018. That was down from its March estimate that the rate would be at 3 percent after 2018.
At her news conference, Yellen will likely be questioned about whatever the consensus view turns out to be for future rate hikes. Don’t expect any firm answers. The Fed chair always stresses that the estimates are based on 17 individual projections and do not represent any official central-bank target.
An animated explainer on the Fed’s benchmark rate: http://bit.ly/2daPpm5