Investors are expecting another quarter-point increase in interest rates Wednesday afternoon as the Federal Reserve's policymaking committee winds up its first two-day meeting under new Fed Chairman Jerome Powell.
Economists are wondering whether faster economic growth might cause the Fed to pick up the pace of its rate hikes. The Fed has signaled three rate increases for 2018, but accelerated growth could cause policymakers to add an additional hike.
The Fed "faces some key questions," says economist Mickey Levy of Berenberg Capital Markets. "How much momentum is there in the economy, and will the stronger growth be sustained, or is it temporary?" And Levy wonders, "will the stronger economic momentum generate overheating" and push inflation too high?
The Fed has raised the benchmark federal funds rate five times in quarter-point steps since December 2015. Prior to that, the central bank held rates near zero for seven years to encourage borrowing and spending and help support the recovery from the Great Recession.
Increases in the federal funds rate eventually move borrowing rates for consumers and businesses higher.
Like most Fed watchers, Levy expects policymakers to raise its key rate another quarter-point Wednesday, to a target range of 1.5 percent to 1.75 percent. He also expects Fed officials to boost their growth outlook for 2018 and 2019, while lowering their forecast for the unemployment rate.
Fed officials are likely to boost their growth projections because of stimulus added to the economy since their December meeting. That includes a large tax cut that will boost profits for businesses and put money in consumers' pockets. It also includes an additional $300 billion in government spending over the next two years, the result of a budget agreement approved by Congress in February.
Investors will also be assessing how effective Powell is as a communicator. Levy says he expects Powell's remarks "to focus less than Yellen's on detailed labor market conditions ... and more on overall economic performance, and the Fed's role in supporting sustained expansion."
Diane Swonk, chief economist at Grant Thornton, said she expects Powell to be "optimistic in his tone regarding the outlook for the overall economy." In fact, Powell told Congress recently that, in his personal view, the economy has strengthened since December, when Fed officials last updated their forecasts for the economy.
At his news conference, Powell will likely get questioned about the economic effects of tariffs being imposed by the Trump administration, Swong says. She says he probably won't answer that question directly. Fed officials "will likely discuss the risks of a trade war during this meeting," she says, but the details of that discussion won't be available until the minutes of their meeting are released in three weeks.
Powell will want to put his mark on the Fed, Swonk says, and one way he might do it is to increase transparency by announcing that he'll hold a news conference after every Fed meeting. Currently, news conferences come after only four of the Fed's eight meetings each year.