The Federal Reserve next week will have its last monetary policy meeting of the year and investors expect the central bank to raise the cost of borrowing money as the U.S. economy avoids recession.
An interest-rate hike of 0.25 percentage point will match Wall Street’s forecasts as analysts focus on the Federal Open Market Committee’s comments on monetary policy, says Michelle Meyer, U.S. economist at Bank of America Merrill Lynch.
“The Fed will likely state that given progress toward its objectives, the Committee decided to raise rates, but will still note that the stance of monetary policy remains accommodative,” she says in a December 8 note obtained by Newsmax Finance. “The combination of the drop in the unemployment rate and rise in inflation expectations as well as the upward trend in realized inflation will likely leave the Fed feeling more comfortable with inflation risks.”
The unemployment rate last month fell to a nine-year low of 4.6 percent, which would be seen as a sign of a strong economy, except that wage growth was weak and thousands of people left the work force. Investors also forecast that inflation will exceed the Fed’s 2 percent target as the economy gets a lift from the pro-business policies of President-Elect Donald Trump.
2017: One and Done
Bank of America Merrill Lynch economists anticipate the Fed will raise rates only once in 2017, and that will be at the September meeting.
Meyer says the Fed’s unemployment forecast will fall to 4.7 percent from 4.8 percent while estimates of economic growth will be revised higher to 1.9 percent to 2 percent.
“Looking ahead to the next three years, we think the risk is for upward revisions to inflation,” Meyer says.
Fed Chair Janet Yellen will answer reporter questions after the central bank announces its rate decision on Wednesday.
Bank of America Merrill Lynch says to look for the following:
- Risk management: "We think Fed Chair Yellen will once again emphasize the need for risk management given the constraints at the effective lower bound. Even though the Fed will have accomplished two hikes, rates are still close to the lower bound, presenting asymmetric risks to policy. We think Yellen will reiterate such in order to note that the Fed is still proceeding carefully with a gradual hiking cycle and that monetary policy remains accommodative."
- Fiscal policy: "Yellen will likely be asked about the various fiscal policy proposals including tax reform, spending programs and deregulation. We think her most recent Congressional testimony on November 17th is a good blueprint for her comments. Most notably she urged lawmakers to focus on steps that would increase productivity while noting that 'with the debt-to-GDP ratio at 77%, there is not a lot of fiscal space should a shock to the economy occur, an adverse shock that did require fiscal stimulus.' She also noted that many of the regulatory reforms are important in diminishing the odds of another financial crisis and would not want to see them rolled back."
- Slack in the economy: "Yellen will likely note that the economy is near or at full employment. That said, she could mention that there are still signs of underutilization and there could be additional slack. This could be reflected in the recent rise in the labor force participation rate."
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