Anticipation surrounds Fed's rate forecasts after next hike | AP business

  • Anticipation surrounds Fed's rate forecasts after next hike | AP business

Anticipation surrounds Fed's rate forecasts after next hike | AP business

The Federal Reserve is expected to raise interest rates by 25 basis points at a 2 p.m. meeting Wednesday, after data showed consumer prices in the U.S. rose last month at the fastest pace in six years.

Federal Reserve Chairman Jerome Powell speaks at a news conference following the Federal Open Market Committee meetings in Washington, U.S., March 21, 2018.

Following Tuesday's inflation data, Michael Pearce, senior U.S. economist at Capital Economics, said that while part of the rise in consumer prices was due to a rise in gas costs, "We expect underlying inflation to trend gradually higher from here, which will prompt the Fed to hike rates twice in the second half of the year". Namely, will Powell schedule a press conference after each of its 8 yearly meetings, or will the current schedule of quarterly press conferences hold.

Since the Fed last met in early May, most economic indicators have signaled steady strength. "The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation", according to a Fed statement.

"The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in US history while meeting inflation and employment objectives", said Stephen Gallagher, chief USA economist at Societe Generale.

Job growth has consistently outperformed in recent years, driving unemployment down to 3.8 percent in May, the lowest reading since 2000. The case for a slight acceleration in rate hikes would be to take account of faster economic growth expected this year, partly a result of increased consumer and business spending from the tax cut Congress enacted late last year.

This plot showed Fed officials in March were roughly split on whether two or three additional rate hikes would be warranted this year.

The Federal Reserve is widely expected to increase interest rates again Wednesday, which means higher rates on credit cards, home equity lines and other kinds of borrowing. But if it miscalculates and overdoes the credit tightening, it can trigger a recession. The Fed's expected move reflects a USA economy that is still fundamentally healthy nine years into an expansion. It will become the longest if it lasts past June 2019, at which point it would surpass the expansion that lasted from March 1991 to March 2001.

Diane Swonk, chief economist at Grant Thornton, suggested that the economy could experience a "growth recession", in which the gross domestic product slows so much that unemployment starts to rise.

China and the other nations have pledged to retaliate with their own tariffs on US exports to their countries, thereby risking a tit-for-tat trade war that could dim prospects for the USA and global economies.

The Fed's pace of rate hikes for the rest of the year could end up reflecting a tug of war between a sturdy economy and the risks to growth, including from a potential trade war that could break out between the United States and such key trading partners as China, the European Union, Canada and Mexico.

A global trade war would risk cutting into US economic growth by depressing American export sales and raising inflation by making consumers and businesses pay more for imports.