Fed poised to signal pause in US interest rate hikes

Washington (AFP) –


The US Federal Reserve will wade into a charged political atmosphere on Wednesday, with another interest rate hike likely but accompanied by a strong sign it will hold off on further increases.

The Fed opened the second day of its highly anticipated policy meeting but the outcome is perhaps the most uncertain of any in the past decade. A remarkably low 75 percent of market participants expect an increase in the federal funds rate which is used to set the cost of borrowing for everything from homes to cars.

Investors are holding their breath until the Fed announcement at 1900 GMT.

A surprise is still possible but the likely Fed action seems certain to anger President Donald Trump who has attacked the central bank repeatedly on Twitter for even considering going ahead with the fourth hike this year in the benchmark borrowing rate.

But with increasing signs the US economy may have peaked causing stock markets to crumble in recent weeks, what analysts and investors are looking for is confirmation the central bank will stand on the sidelines for a time.

While economic conditions have not "changed enough yet to cause a dramatic slowing in growth" of the US economy, "Fed officials are widely expected to deliver a 'dovish hike,'" Jim O'Sullivan of High-Frequency Economics said.

That entails raising the benchmark interest rate to 2.5 percent from 2.25 percent but removing language from the statement that had for months promised "further gradual increases."

The Fed also will release the quarterly forecasts from the policy committee members, which seems likely to show they expect to raise rates only once or twice next year rather than the three hikes previously expected.

Fed Chairman Jerome Powell will hold a press conference after the meeting, which will give him the opportunity to explain the message to financial markets.

- 'Economically illiterate' -

The US economy remains strong with unemployment at a nearly 50-year low at 3.7 percent, inflation barely at two percent and business confidence persistently high.

But cracks have started to appear and many economists now say the economy may have peaked, especially since the housing market has been trending downwards in recent months.

Trump's trade wars and signs China's economy is slowing have added to the global uncertainty.

Powell in recent statements shifted gears to indicate the central bank is considering suspending its rate increases while it takes time to view more economic data.

In a speech in mid-November, he likened it to someone walking through a dark room full of furniture: "What do you do? You slow down, you stop probably and feel your way. It's not different with policy."

The Fed has increased the key lending rate eight times since December 2015, bringing it up to 2.25 percent after a long stretch at zero in the wake of the global financial crisis.

Trump would rather the Fed stop now and continue to help boost the economy, warning in his latest attack on Twitter that the central bank would be making "yet another mistake" by raising interest rates on Wednesday.

Trump has repeatedly broken with the norm respected by US presidents of recent decades who refrained from criticizing the Fed.

Analysts and former Fed members warn that Trump's unprecedented vitriol could cause central bankers to try to prove their independence by raising rates even if they might otherwise have held off.

"Reputations take a long time to build but can be lost very quickly and we're pretty sure that Jay Powell does not want to go down in history as the Fed Chair who was pushed around by an economically illiterate president," Ian Shepherdson of Pantheon Macroeconomics said in a client note.