INSUBCONTINENT EXCLUSIVE:
The Federal Reserve is all but sure to leave interest rates unchanged this week, though steady economic growth and inflation pressures will
likely keep the Fed on a path toward further rate hikes later this year.
The central bank is meeting as its board is undergoing a makeover,
with a raft of new appointees by President Donald Trump who appear generally supportive of the Fed’s cautious approach to rates since the
Great Recession ended.
Despite Trump’s complaints during the presidential race that the Fed was aiding Democrats in keeping rates
ultra-low under President Barack Obama, his choices for a chairman and for other slots on the Fed’s board have been moderates rather than
hard-core conservatives who would favor a faster tightening of credit.
The Fed does seem inclined to continue raising rates modestly this
year to reflect a steadily improving economy and to keep inflation pressures under control
Economic growth remains solid, and most inflation gauges show annual price increases finally moving close to the Fed’s 2% target level
But few analysts expect any aggressive pickup in the pace of rate hikes
Most foresee either two or three additional increases in the Fed’s benchmark rate by year’s end, coming after an earlier hike in
January.
As Jerome Powell, Trump’s hand-picked new Fed chairman, said at a news conference after the central bank’s most recent meeting
in March, “We’re trying to take the middle ground, and the committee continues to believe that the middle ground consists of further
gradual increases in the federal-funds rate.’’ Bond investors are signaling that they expect a pickup in US inflation, having bid up the
yield on the 10-year Treasury note last week above 3% before the yield settled just below that by week’s end
A year ago, the 10-year yield was just 2.3%.
Under Powell’s predecessors, Janet Yellen and Ben Bernanke, the Fed’s board endured
criticism from House Republicans over its decision to pursue a bond purchase program designed to lower long-term borrowing rates and to
leave its key rate at a record low near zero for seven years
The critics charged that those policies would eventually produce destructive bubbles in the prices of stocks and other assets and,
eventually, undesirably high inflation.
But so far, Trump’s reshaping of the Fed’s board reflects a generally status quo approach
“Trump’s criticisms during the campaign have not been borne out by his decisions on who to put on the Fed,’’ said Mark Zandi, chief
economist at Moody’s Analytics
“I don’t think this new Fed views the extraordinary steps the central bank took during the crisis as out of bounds.’’ Since the Fed
began raising rates in December 2015, the pace has been modest and gradual: One quarterpoint rate increase in 2015, one in 2016, three in
2017 and one so far this year
Even now, the Fed’s benchmark short-term rate, which influences consumer and business loan rates throughout the economy, remains in a low
range of 1.5 to 1.75%.
When the Fed announced its most recent rate hike last month, it forecast that it would raise rates twice more this
Powell, a Republican who was originally nominated to the Fed’s board by President Barack Obama, has so far signaled an approach to rate
hikes that appears similar to the cautious one Yellen pursued.
Two weeks ago, Trump announced the nomination of Richard Clarida, a Columbia
University economist and expert on monetary policy, as the Fed’s vice chairman
That choice was seen as providing specialised expertise for Powell, who is not an economist.
