The financial world’s worst-kept secret is that the Federal Reserve is all but sure to raise interest rates on Wednesday. AP Photo/Susan Walsh
Uncertainty surrounds quantity and rate of hikes
BY MARTIN CRUTSINGER
The Associated Press
WASHINGTON – The worst-kept secret in the financial world is that the Federal Reserve is all but sure Wednesday to raise interest rates from record lows by a modest quarter point.
On that, pretty much everyone agrees. The uncertainty hinges on what the Fed will say about how much and how fast it expects to raise rates again in coming months. A relatively aggressive pace would contribute to higher borrowing rates and risks slowing the economy. It could also roil financial markets.
It isn’t the message investors want to hear. They’d prefer for the Fed to signal that it foresees a slow and gradual series of rate hikes, one that would allow it to periodically assess whether the economy was sturdy enough to withstand higher rates. The Fed has kept its benchmark short-term rate near zero since setting it there in 2008 to help save the financial system in the depths of the financial crisis. Now, with the job market all but fully healthy, the central bank is ready to begin lifting rates toward normal levels.
Its policymakers have signaled in recent months that they foresee an incremental pace. But investors want further assurance Wednesday. One factor that could keep the pace of hikes gradual is the absence of inflation pressures. In fact, inflation remains stubbornly below the Fed’s 2 percent target level. This has resulted from global economic weakness, falling energy prices and a strong dollar, which makes imports cheaper in the United States.
Investors will scrutinize the Fed’s statement and Chair Janet Yellen’s news conference afterward for clues to what might cause an acceleration of rate increases over the next year.
“I am worried that the stronger dollar and falling oil prices have masked some underlying inflation pressures which could surface quickly as we move closer to full employment,” said David Jones, chief economist at DMJ Advisors.
Still, most economists think the statement the Fed will issue when its latest policy meeting ends and Yellen’s remarks afterward will signal that while the Fed is ending an era of near-zero rates, it isn’t planning a very fast liftoff.
“The Fed is going to package this announcement in a nice holiday box with a pretty ribbon on top,” said Sung Won Sohn, an economics professor at California State University, Channel Islands. “There will be plenty of soothing words that this is just a small step that has been in discussion for some time and future increases will be very slow and gradual.”