Fed is set to raise rates this week despite political tumult

Randall Padilla
June 12, 2017

For the second time this year, the U.S. central bank appears poised to raise interest rates despite fresh signs that the world's largest economy is not in peak condition. Recent Fedspeak has clearly downplayed the subdued first quarter for the USA growth and weak inflation prints as temporary and implied that the Fed would continue with its policy plan for the rest of 2017 as full employment has been achieved.

The focus is on whether the Fed is looking at three or four rate hikes this year, according to Argonaut Securities analyst Helen Lau.

Economists J. Bradford DeLong said the Fed has overestimated the economy for 11 years in a row, making them less reliable than a coin toss.

The Federal Open Market Committee and the Federal Reserve Board of Governors Board of Governors are set to meet Tuesday, June 13 and Wednesday, June 14, in Washington D.C. It will be their fourth meeting of 2017.

Economists are almost unanimous that the central bank will raise rates at the end of the two-day meeting on Wednesday.

The market is also anxious to see if the Fed becomes more dovish in its outlook, he said. Some economists believe that the FOMC, chaired by Janet Yellen, will be forced to raise rates twice more.

The more important news will be what it says about shrinking its balance sheet, likely later this year.

They suggested traders saw about a 24 percent chance of rates rising to 1.25-1.50 percent at the Fed's September 19-20 meeting and a 53 percent chance of such a move at its December 12-13 meeting.

Most economists don't expect this language change.

Even with the growing doubts, as of Friday, futures markets were still forecasting a better-than-99-percent chance of an increase at this week's Fed meeting.

The recent soft numbers on the economy may have weakened the case for an increase in the benchmark lending rate by the Federal Reserve, which begins a two-day meeting tomorrow to review monetary policy. That means expectations for tighter monetary policy firmed slightly even amid falling confidence that the Fed will reach its inflation target any time soon. The central bank showed in the run-up to its March meeting that they "can jawbone quickly" and raise expectations for a tightening, he said.

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