US Fed to hike interest rates for first time in 2018

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By MG News | March 21, 2018 at 09:55 AM GMT+05:00

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AFP/APP – The Federal Reserve is widely expected to announce Wednesday the first of at least three interest rate hikes this year as the central bank works to head off inflation.

Though US central bankers admitted to being befuddled by the absence of inflation last year despite the economic recovery and strong job market, they now see signs of rising price pressures.

So far, the Fed has been moving gradually to tighten monetary policy to prevent the world's largest economy from overheating.

But a host of factors -- including the massive tax cuts enacted by Congress, a weaker dollar and robust job creation -- have markets on the lookout for signs the Fed could become more aggressive, and boost rates four times this year instead of three.

Following the Fed's decision, newly-installed Chairman Jerome Powell will address the news media for the first time in a quarterly press conference. His words will be closely scrutinized for hints about the central bank's thinking and the likely pace of interest rate increases.

Ian Shepherdson of Pantheon Macroeconomics said markets already accepted the coming Fed rate hike, so the comments and the updated quarterly forecasts will be of more interest.

"After a widely-anticipated central bank policy move, what really matters is what policymakers say about their actions and intentions," he said in a client note.

But Powell is likely to avoid sending ripples through markets by criticizing the $1.5 trillion tax cuts, even though they are expected to balloon the government deficit and stimulate an economy already at full employment, Shepherdson said.

Carefully chosen words

"No matter how hard the press push him, he's not going to say that the fiscal easing is a mistake," he said.

First-quarter economic forecasts have dimmed in recent weeks on a batch of mixed economic data, including a widening trade gap, weak sales of housing, autos and durable goods, as well as soft retail and construction spending.

But with very strong jobs markets, record business and consumer sentiment, low unemployment and signs of rising inflation, even dovish Fed officials have indicated their support for tighter monetary policy.

Meanwhile, industry groups and markets have been badly rattled this month by President Donald Trump's sudden decision to impose punishing duties on steel and aluminum imports.

Tariffs could raise prices for key inputs and consumer products, and spark tit-for-tat retaliatory measures by trading partners, factors that move the inflation needle higher.

But all of this is too far down the road for the Fed to comment on this week, said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics.

"If I were them, I would say very little about it now," Gagnon told AFP.

"I think they'll probably ask their staffs about it but won't want to talk about it publicly."

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