With rate hike in the bag, Fed may hint at Trump effect
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[December 13, 2017]
By Howard Schneider
WASHINGTON (Reuters) - The Federal Reserve
is widely expected to raise interest rates on Wednesday, but, more
significantly, it may give its strongest hint yet on how the Trump
administration's tax overhaul could affect the U.S. economy.
Investors will pay close attention to how the central bank aims to
balance a stimulus-fueled economic boost with the ongoing weak inflation
and tepid wage growth that has curbed some policymakers' appetite for
The Fed's policy statement and its latest economic projections are due
to be released at 2 p.m. EST (1900 GMT) following the end of a two-day
meeting. Fed Chair Janet Yellen is scheduled to hold a press conference
half an hour later. It will be her last before her four-year term ends
early next year.
Her successor, Fed Governor Jerome Powell, said at his recent
confirmation hearing before a Senate panel that he had "no sense of an
overheating economy," an early signal he may not want to quicken the
pace of rate increases until there is evidence of an acceleration in
wage growth and inflation.
The Fed has increased rates twice in 2017 and is currently expected to
push through three more hikes next year.
Much of Yellen's tenure as Fed chief has been defined by a desire to
leave loose monetary policy in place as long as possible in the hope
that unemployment continued to decline, workers rejoined the labor
force, and wages rose.
Powell, who has worked closely with Yellen, said he feels that process
still has room to run.
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The Federal Reserve
headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/File
Recent bullish data, highlighted by continued solid job gains and a jump in
economic growth, has prompted some analysts to speculate that the central bank's
new projections will reflect an expectation of four rate increases next year.
There are also signs inflation may be firming after a lengthy bout of weakness.
Fed policymakers have been stymied at how price rises have remained persistently
below the central bank's 2 percent target despite labor market strength and a
President Donald Trump's proposed tax plan, including a sharp reduction in the
corporate income tax, could further boost the U.S. economy if it passes the
Republican-controlled Congress, as appears likely.
In a recent note projecting four Fed rate increases next year, Paul Ashworth,
U.S. economist for Capital Economics, said "the stimulus could provide cover for
the Fed to normalize interest rates at a faster pace than it otherwise would
have been able to."
What Ashworth called a "badly timed" tax cut "would be expected to raise
inflation as much as it boosted real GDP growth," he said.
(Reporting by Howard Schneider; Editing by Paul Simao)
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