Federal Reserve officials are likely to keep interest rates steady at
their two-day policy meeting that concludes Wednesday, but they could debate
the outlook for rate increases later in the year and what strengthening
inflation means for monetary policy.
Fed Chairman Jerome Powell won’t hold a press conference after the
meeting, and officials aren’t releasing new economic projections. Still, the
internal discussions could be lively, though we could see few hints of the
debate in the new policy statement, to be released at 2 p.m. EDT. Here’s a
look at the main issues:
The Rate Path
Officials in March penciled in two more rate rises this year but were about evenly
divided between those who favored two and those seeing three additional
Because markets expect the Fed to next raise rates at its June meeting,
a big question looming over the May gathering is the policy path for the rest
of the year.
The statement isn’t likely to signal whether more officials are leaning
toward raising rates three additional times this year, instead of two. Watch
instead for the release of the meeting minutes in three weeks and policy
makers’ speeches and other commentary later this spring.
Fed officials spent much of 2017 struggling to explain a surprising
weakness in inflation that threatened to slow down their rate rises. That
concern now appears to be in the rearview mirror. Instead, the discussion is
turning to how high they might let it go before picking up the pace of rate
Annual inflation has returned to the Fed’s 2% target, according to data released Monday. So-called
core prices, which exclude the volatile food and energy sectors, rose 1.9%
through March, up from 1.5% in December.
Also important to Fed officials: Investors’ expectations of future
inflation have risen this year. The 10-year inflation break-even rate, which
reflects the yield premium on the 10-year U.S. Treasury note over the
comparable Treasury inflation-protected security, has settled recently at its
highest levels in four years.
Watch the statement for any new language on inflation. Officials could
change the line in their March statement that annual inflation “continued to
run below 2 percent” and another saying that market-based measures of inflation
compensation “remain low.”
Pay particular attention to any changes in their description of the
inflation outlook—which matters more for the rate path. In March, they said
annual inflation was “expected to move up in coming months and to stabilize”
The Balance of Risks
For the past year, the Fed’s policy statement has referred to the
near-term economic risks as “roughly balanced,” meaning the prospects of growth
that is either stronger than anticipated or weaker than anticipated are about
The economy grew at a 2.3% annual rate in the first quarter, according to the
Commerce Department’s initial estimate, down from 2.9% in the fourth quarter.
The figures are unspectacular but still faster than what Fed officials expect
over the long run.
The March meeting minutes showed officials are likely to look
past any weakness in the first-quarter figures, which have typically been soft
and followed by a second-quarter rebound.
The unemployment rate has held steady, at 4.1%, since October. Hiring has been strong, with
employers adding 202,000 jobs a month on average this year. Officials have
little reason to revise the language in their statement that for several
meetings has described the labor market as strong.
Still, the question of how much lower the unemployment rate can fall
before wages rise—and whether wage increases, in turn, will fuel stronger price
pressures—figures to be among the most important officials must grapple with
How Far From Neutral
The Fed is probably a few more interest-rate moves away from a neutral
interest-rate setting, or the level at which its short-term benchmark rate
neither stimulates nor slows growth.
Two big questions for officials this year are how far do they need to
raise rates to reach neutral, and how much beyond that level do they expect to raise
rates to keep inflation under control.
The challenge for central bankers is to slow growth to a sustainable
pace, but not to tighten policy so much that the economy tips into recession.
Recently enacted tax cuts and a government spending increase are set to
provide more stimulus to the economy amid already low unemployment and firmer
inflation. Fed officials have to sort out how much these changes could boost
growth and price pressures.
It’s probably too soon for them to have reached firm conclusions on this
front. But the upturn in inflation, which occurred largely before the fiscal
stimulus ripples through the economy, could add a new dimension to these
Late last year, officials began to raise their growth projections due to
the tax-cut legislation, but they held back from revising their interest-rate
projections because of low inflation readings. Higher inflation could make it
harder to maintain that position.
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