Fed watchers seek hints about rate hikes beyond 2018

The Federal Reserve will surprise no one if it does Wednesday what it seems poised to do for a third time this year: raise its key short-term interest rate by a modest quarter-point to help keep inflation in check—and hint that another hike is likely in December.

What Fed watchers will really be seeking is any sign of whether the central bank might slow its rate hikes in the months ahead. For 2019, Fed leaders have estimated another three rate hikes.

However, analysts expect the economy to weaken next year, in part from the effects of the trade conflicts President Donald Trump has pursued with China, Canada and Europe. An economic slowdown would likely lead the Fed to throttle back on its rate increases to avoid stifling growth.

Changes to 2018-19 rate projections at September’s meeting would be surprising, says a Desjardins report, “especially since the economy seems to be growing in line with what the Fed leaders predicted last June.”

The report adds, however, that there could be a slight change in estimates for the end of 2020 and, in particular, the long term.

For example, newly confirmed Fed vice-chair, economist Richard Clarida, could change the median estimate of the appropriate long-term federal funds rate. “That estimate, which is equivalent to the neutral rate, could easily swing from 2.875% to either 2.750% or 3.000%,” it says.

The Fed could also omit from its statement that monetary policy remains accommodative as key rates get closer to the neutral rate.

Yet these potential changes shouldn’t be seen as strong indicators of what to expect from the Fed, says Desjardins, because Fed leaders have recently downplayed the importance of neutral rate estimates as a guide for monetary policy.

Thus, Desjardins expects the Fed leaders to still be comfortable with monetary tightening by raising key rates 0.25% per quarter “for some time to come.”

“A change in the number of hikes for 2018 or 2019 would be a real surprise,” says the report, “and the bond market would likely react strongly.”

For full details, read the Desjardins report.