By Jason Lange
WASHINGTON (Reuters) – The U.S. Federal Reserve is expected to leave interest rates on hold on Wednesday but could flag whether it plans to cut rates later this year as U.S. President Donald Trump has demanded.
Below are questions and answers on what to look for when the U.S. central bank concludes a two-day policy meeting at 2 p.m. ET. (1800 GMT)
HOWDOESTHEFEDTELL US ABOUTINTERESTRATES?
The Federal Open Market Committee, the Fed’s policy-setting arm, issues a written statement at the end of each of the eight scheduled meetings it holds in Washington every year. That describes the FOMC’s sense of how the economy is doing and what it believes is the appropriate level of interest rates to foster maximum employment and price stability, its dual mandates assigned by Congress.
The Fed’s current policy rate is set in a range of 2.25% to 2.5% and is a benchmark for the cost of credit throughout the U.S. economy and beyond. So the Fed’s decision affects everything from the interest rate American consumers pay on a 30-year mortgage to how much it costs multinational corporations to raise money in the bond market.
Typically the FOMC discloses whether it has held rates the same or changed them in the second or third paragraph of the statement.
WHY IS THERETALKABOUTRATECUTS?
The U.S. labour market looks strong by most measures and inflation isn’t far from the central bank’s 2% target, but some policymakers have flagged rising risks for the economy. Job growth is slowing, a global economic slowdown is hitting U.S. factories and America’s trade war with China might be playing a role. Also, Trump is pressuring the Fed to reduce rates, saying in October the central bank had “gone crazy” under Fed Chair Jerome Powell.
Even if the Fed keeps rates steady on Friday, some Fed policymakers might signal they expect rate cuts by the end of the year or possibly in 2020. The Fed will publish alongside the policy statement an addendum of policymaker projections on where they think rates should be.
WAIT, IS IT NORMAL TO TALKABOUTRATECUTS?
Not at all, and there might be unintended consequences to signalling lower rates are around the corner. Some households and businesses might decide they are going to wait for lower borrowing costs before taking out a loan to by a car or a building, even if interest rates were already falling. Decisions to hold back on purchases could weigh on the economy. As key stewards of economic stability, central bankers usually avoid giving a tip that the economy is heading south.
SO HOWWILLTHEFEDTELL US IT’S WORRIED?
It has code words for that. When the Fed started a rate-rising campaign in 2015, it had signalled that more hikes remained in the pipeline. Its latest rate increase occurred exactly six months ago, on December 19, 2018.
Then, early this year as concerns rose about the economic outlook, the Fed began saying in its policy statement that it would be “patient” about rate changes, meaning that it was in no hurry to alter rates because of concerns about the economic outlook. The Fed has left rates unchanged at the three meetings since then.
Friday’s statement might introduce a new code, perhaps borrowing from Powell’s recent comments that the Fed would take actions “as appropriate” to keep the economy growing. That would be seen as a hint that it is ready to cut rates if it saw a slowdown on the horizon.
It might depend on how the stock market reacts to the Fed’s policy statement and to the answers that Powell gives reporters in a news conference scheduled for 2:30 p.m. (1830 GMT). A jump in equity prices could signal investors are more confident the Fed is going to keep the economy growing. Strong economic growth could support Trump’s bid for re-election in 2020.
Reporters asked Trump on Tuesday if he wanted to demote Powell, following a report that day that White House lawyers had explored whether they could legally strip Powell of the Fed chairmanship. Trump responded: “Let’s see what he does.”
(Reporting by Jason Lange; Editing by Dan Burns)