Fed watchers looking for signs of next interest-rate hike

  • The Federal Open Market Committee, the Federal Reserve Bank’s monetary-policy setting panel, concludes a two-day meeting Wednesday in Washington, D.C. Photo: KAREN BLEIER /AFP /Getty Images / AFP or licensors



Photo: KAREN BLEIER /AFP /Getty Images

The Federal Open Market Committee, the Federal Reserve Bank’s monetary-policy setting panel, concludes a two-day meeting Wednesday in Washington, D.C.

The Federal Open Market Committee, the Federal Reserve Bank’s monetary-policy setting panel, concludes a two-day meeting Wednesday in Washington, D.C.


Photo: KAREN BLEIER /AFP /Getty Images

Fed watchers looking for signs of next interest-rate hike


The Federal Open Market Committee won’t likely raise interest rates at the end of its two-day meeting in Washington on Wednesday, but consumers should brace for higher rates in December, badysts said.

“I expect a re-articulation of a gradual increase in the Fed funds rate and a continued reduction of the balance sheet,” said Jim Kee, South Texas Money Management president and chief economist.


Kee was referring to a gradual increase in the short-term interest rates that the Federal Reserve’s monetary policy panel controls and the scheduled reduction in the Fed’s securities holdings that started in October.

“The futures market is expecting another rate hike this year. There was a strong GDP (gross domestic product) report for the third quarter last week and another one is expected for the fourth quarter of 2 to 3 percent,” Kee said.

The FOMC will issue a statement at 1 p.m. Wednesday after its meeting this week concluded, which will be read closely by Greg McBride, Bankrate.com chief financial badyst.

“The Fed has teed things up for a December rate hike. I expect the statement to reflect an upbeat view of the economy. It also will downplay the inflation trend. Inflation has not unfolded as expected,” McBride said.

The FOMC directly sets short-term rates, specifically the fed funds rate for overnight loans between banks. That dictates rates on consumer loans, namely mortgages, because the federal funds rate indirectly impacts the yields of 10-year U.S. Treasury bonds. The typical 30-year mortgage gets refinanced, or the home sells, long before 30 years are up — which is why mortgage bonds — and loans — are closely tied to the 10-year Treasury yields.

But changes to the federal funds rate spreads far and wide because it also effects other key rates, including the London Interbank Offering Rate and prime rate. Credit card companies, auto lenders, student loan providers and banks all use LIBOR or the prime rate to determine what consumers get charged to borrow money or receive on deposits. That trickles down to rates on virtually everything, helps control inflation, prices on goods of all kinds and can even impact wages.

While the FOMC wants to keep inflation at around 2 percent, its been hovering at around 1.5 percent over the last six months, McBride said. Raising interest rates likely would push inflationary pressures in the wrong direction, he said.

Consumers like low inflation, 1 percent to 1.5 percent, but the FOMC prefers a higher rate to keep deflation from posing a danger to the broader economy, McBride said. The Fed does not want to be in a position of fighting deflation if the economy takes a downturn, he explained.


“The core inflation rate remains a source of frustration. The Fed and other central banks want 2 percent or more to fight deflation,” Kee said.

The reason inflation has remained low is mysterious, Kee said. “The Fed is confounded …The Fed doesn’t have the answers,” he said.

McBride said the Fed’s statement Wednesday won’t mention a federal debt ceiling deadline and a possible government shutdown in December.

The deadline for raising the debt ceiling will come a few days after the next FOMC meeting that concludes Dec. 13, he said. A looming government shutdown could affect the FOMC next interest rate decision.

Meanwhile, on Thursday, the White House is expected to announce President Donald Trump’s choice for Federal Reserve chairman. Current Fed Chairman Janet Yellen’s term expires Feb. 1. Trump’s choice is reportedly Jerome “Jay” Powell, a current Federal Reserve governor and FOMC member.

“Powell would represent some continuity from Yellen,” McBride said, citing Powell’s rate-policy votes have been in line with Yellen’s since becoming a Fed governor in 2012.

“But he is not an economist. He has no Ph.D. in economics. That’s a break from tradition. Do you want a lawyer deciding monetary policy or an economist running it?” McBride asked. Powell has a law degree from Georgetown University but most of Powell’s career has been in investment banking.

A change in Fed leadership could be significant two to three years from now because the Fed has reached a significant point by raising interest rates several times in the last year and is reducing its balance sheet, which could reduce the money supply, he pointed out.

“It’s new territory for the Fed. History has not been kind to the Fed. The last two rate-hike cycles have ended in recession,” McBride said.

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