Federal Reserve Expected to Deliver Rate Increase

The Federal Reserve is likely to raise short-term interest rates by a quarter percentage point after its two-day policy meeting concludes Wednesday, the fourth such increase since December 2015. Officials also will release new projections for the economy and interest rates, and could announce their plan for shrinking the Fed's portfolio of Treasury and mortgage bonds. The central bank will release a statement and the forecasts at 2 p.m. EDT, and Fed Chairwoman Janet Yellen holds her quarterly press conference at 2:30 p.m. Here's what to watch for:

The Upward Path for Interest Rates

As in previous years, the Fed and markets are at odds over the central bank's projected path of rate increases. Fed officials in March raised their benchmark federal-funds rate to a range between 0.75% and 1%, and penciled in two more quarter-point rate rises this year. The new forecasts to be released Wednesday will show whether they are sticking to that story. Investors, though, see a nearly 50% probability that this week's rate increase will be the last one this year, according to fed-funds futures data from CME Group. In the past, the Fed has eventually lowered its expectations to match market estimates.

Balance Sheet in the Balance

Investors will be particularly attuned to any new Fed information on its plans for shrinking its $4.5 trillion portfolio of bonds and other assets. Officials have laid out a tentative plan to slowly let those securities run off the balance sheet as they mature. It is still unclear how long and gradual the Fed will want this process to be, or when it will begin. Expect to get a few more answers Wednesday, either from the Fed statement or from Ms. Yellen during her press conference.

The New Low on Employment

How low can the unemployment rate go? In March, Fed officials anticipated it would end the year at 4.5%. It already is at 4.3% and still could fall farther. Clearly, officials are going to have to revisit their employment projections for 2017. And they could lower their 4.7% estimate for the longer-term unemployment rate, the level that signals a fully healthy labor market. If they do, it might help explain why inflation pressures have been so muted.

Inflation, the Perpetual Weakling

Inflation hit the Fed's 2% target in February after undershooting it for nearly five years, which appeared to validate officials' economic outlook. Since then, though, the personal-consumption expenditures price index -- the Fed's preferred gauge -- sunk back to 1.7% in April. Officials say the recent drop is merely a temporary phenomenon. But what if it isn't? Look to the statement and Ms. Yellen's press conference for clues about the Fed's latest thinking on sluggish price gains.

The Chairwoman's Future

Ms. Yellen's term as chairwoman ends next February. But her term on the Fed's board of governors isn't up until 2024. In the past, Fed chairmen have stepped down once their term at the helm is up to avoid upstaging their successors. Ms. Yellen hasn't ruled out staying on if she isn't offered a second term as chairwoman. If she does, it would give President Donald Trump one less seat to fill on the seven-member Fed board. Mr. Trump hasn't ruled out reappointing her, but isn't expected to do so. Ms. Yellen may give insight into her thinking during her press conference.

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

June 14, 2017 05:44 ET (09:44 GMT)