The Feds may hike interest rates at this meeting, and that means Trump's Goldilocks economic policy might take a big hit where it hurts - in his base camp and public opinion.
First, and foremost, the Committee inserted into the statement the sentence, "The economic outlook has strengthened in recent months". But he said the Fed's regional bank presidents around the country have heard concerns from businesses about the consequences of the tariffs.
In October, the Fed began reducing its unprecedented bond holdings of more than USD4 trillion, by USD20 billion a month, a process that is "proceeding smoothly", Powell said. The Fed has signaled three rate increases for 2018, but accelerated growth could cause policymakers to add an additional hike. The practice was instituted by former Fed chairman Ben Bernanke.
Whether they expect three or four rate hikes this year, investment strategists agree that the US central bank is in the process of normalizing policy, raising rates as the economy strengthens, which, according to McMillan, "has been the goal for years". "Job gains have been strong in recent months, and the unemployment rate has stayed low".
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YDSTIE: And the members of the Fed's policymaking committee boosted their forecasts for growth in 2018, raising it to 2.7 percent - up from their December estimate.
A higher federal funds rate is likely to make it more expensive for consumers to borrow money for mortgages, charge on credits cards, and take out automobile or student loans, among other things. But it shifted its plans for next year, calling for three more rate hikes instead of two. The Fed also increased expectations for GDP growth in 2019 to 2.4% from 2.1% in December.
The improved outlook is aided by firming economic growth in rest of the world, simulative fiscal policy and overall accommodative financial conditions. The language came even though the committee earlier in the statement said "economic activity has been rising at a moderate rate", a seeming downgrade from January's characterization of a "solid" rate.
But there was a hawkish tone in some of the Fed's observations, and Powell for the first time said the Fed expects above-target core inflation of 2.1%. In theory, he said, lower corporate tax rates and the expensing provisions should encourage more investment in the US, which would lead to a corresponding rise in productivity.
Yet when he testified to Congress again two days later, Powell tempered his view: He stressed that the Fed still thinks it has room to maintain a moderate pace of rate hikes, in part to allow Americans' average wages, which have stagnated for years, to pick up.