The Federal Reserve will raise rates this week’ one US website boldly asserted ahead of the central bank’s meeting later today – the first under its new chairman, Jerome (Jay) Powell, who was confirmed by the Senate in January as successor to Janet Yellen.
Under Yellen the central bank has gradually raised rates in a series of ‘baby steps’, with five quarter-point hikes since the end of 2015 taking them to their current range of 1.25% to 1.5%. Last September the Fed also announced that it would start to run down the stock of bonds it purchased under a $4.5 trillion-plus quantitative easing (QE) programme
The dollar has firmed this week in anticipation. The markets expect Powell to keep to his predecessor’s strategy, with a further quarter point rate increase confirmed later today to be followed by at least two more before 2018 is over and likely two more in 2019. With other central banks around the world chafing to return to a more normal monetary policy, the success of the US in bringing the era of abnormally low rates to a close is being keenly watched.
There are nagging concerns that this ‘gently does it’ approach might need to move up a gear if US inflation stirs back to life – which could involve four rate hikes rather than three in 2018, plus three more next year.
Preparing for the role
The new chairman’s first weeks in the post suggest that the Federal Reserve isn’t about to spring any surprises for the moment though. Powell has been described as a consensus builder, who might tweak policy in response to changing economic conditions but doesn’t want to be seen as the man who pulled the plug on one of the longest US economic recoveries on record.
The new chairman was seen as the continuity candidate when he was confirmed in January as President Trump’s choice. Former colleagues have confirmed Powell’s approach as one of “if it ain’t broke, don’t fix it”, which helped him land the top job – along with a reputation for conducting meticulous research.
A former lawyer and investment banker, he has no formal training in economics – although having served as one of the Fed’s governors since 2012, he has seen first-hand its move from emergency stimulus to steer the US economy from crisis to a modest tightening of policy as growth returned and unemployment steadily reduced.
However, Powell is already aware of the need to choose his words carefully. The markets took fright in February when, in his first congressional testimony, he offered an upbeat assessment of the US economy. For many, it was no more than a statement of the obvious but stock markets chose to interpret it as an indication he was more of a hawk than Yellen.
So in addition to its rate decision, the Fed’s update assessment of the economy later today will also be closely scrutinised. With economies around the world enjoying synchronised growth for the first time in a decade, coupled with some upwards pressure on US prices and fears that Trump’s hard line on slapping tariffs on steel imported to the US might escalate into a trade war, it could be enough to accelerate inflation from its present level of just below the 2% target.