President Donald Trump’s early policy action has caused fireworks on Capitol Hill, but investors are anticipating a relatively quiet Wednesday over at the Federal Reserve as central bankers await more clarity on the president’s fiscal-policy priorities.
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At the conclusion of its two-day meeting, the central bank’s policy-setting Federal Open Market Committee is expected to keep the short-term federal funds rate steady at between 0.50% and 0.75%, after raising it a quarter percentage point in December.
The decision comes a week after Fed Chief Janet Yellen said the economy has made “considerable” progress toward the central bank’s dual mandate of price stability and full employment, noting “solid” job gains and a drawdown in labor market slack. At the same time, though, Yellen warned of a “nasty surprise” if the Fed moves too slowly on rate rises. Because of that, a majority of FOMC participants expect at least three more increases before the year is up.
Federal funds futures, a tool used to predict changes in monetary policy, show a more than 66% probability for at least one increase in the fed funds rate by the June meeting, but a low 4% chance of a rate rise Wednesday.
While the economic backdrop remains stable, an age of expansionary fiscal policy from the Trump administration could spur even more robust economic growth.
While the president, who has been critical of the Fed and its actions since the financial crisis, has taken swift action to implement certain campaign-trail pledges -- including imposing a temporary travel ban on travelers from seven predominately-Muslim nations, an executive order against the Affordable Care Act and a memorandum on the construction of delayed oil pipelines -- bigger promises of lower taxes, less regulation and more fiscal spending (on initiatives like a broad-based infrastructure program) have yet to be enacted.
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Those promises are of particular interest to the Fed, because potential follow-up action could force the central bank into a position of carefully balancing its monetary policy efforts with the Trump administration’s fiscal priorities to ensure the economy doesn’t overheat, or cause runaway levels of inflation.
“If…the Fed is forced to tighten monetary policy to avoid a significant undershoot of the unemployment rate and an overshoot of inflation, the Fed will want to have signaled this response is based on progress toward the dual mandate and nothing else,” Barclays team, led by Chief U.S. Economist Michael Gapen, noted, referring to the Fed’s December meeting minutes which showed a desire to articulate that tighter monetary policy will not be part of a broader effort to work against aggressive fiscal-policy goals.
While inflation has for years run below the Fed’s 2% target, data this week showed a gauge of core personal consumption expenditures held steady in December at 1.7%, compared to the prior year. That rate carries with it a “healthy momentum” and is likely to pick up over the next two years, said Ameriprise Financial Senior Economist Russell Price, but it’s far from a level at which the Fed should be too concerned.
The extent to which Trump’s more permanent policy efforts can impact the overall economy remains to be seen, though initial enthusiasm pushed U.S. stocks to record levels and consumer and business sentiment to multi-year highs.
By the March FOMC meeting, Nomura Chief U.S. Economist Lewis Alexander expects the Fed will have a more complete dataset with which to judge the expected impact of Trump’s first year in office.
“Rep. Mick Mulvaney, President Trump’s nominee for OMB, stated that the Trump administration will have a top-line budget proposal by the end of February. That proposal should indicate to what extent expected increases in spending on defense, border security and veterans would be offset with spending cuts elsewhere,” he said.