The political brouhaha in Washington looks unlikely to blow the Federal Reserve off course from
raising interest rates further in 2017, starting with an increase next month and following up with
another later in the year.
Fed watchers said the central bank will press ahead with plans to gradually normalize rates in
order to rein in an economy that officials believe is growing above its potential and prevent
an already-stretched labor market from becoming even tauter.
“Unlike in 2015 and 2016, the Fed has made pretty clear that it’s on a trajectory of tightening
rates that will not likely be derailed,” said Jonathan Wright, a former central bank economist
who’s now a professor at Johns Hopkins University.
Policy makers in March penciled in two more rate hikes for this year after raising them for the
third time since the end of 2015. They next meet on June 13-14, when they’ll update their
forecasts for the economy and interest rates.
Traders in the money market put the odds of a rate rise next month at about 65 percent,
down from 85 percent on May 9.
They also lowered the probability of a third hike this year to well below 50 percent.
Major U.S. stock indexes recouped a bit of their losses on Thursday after suffering their
biggest declines in eight months the day before on dimming hopes that a politically-wounded
President Donald Trump will be able to push through big cuts in taxes.
Officials in March projected that the economy would grow
2.1 percent both this year and next, above their 1.8 percent estimate of its long-run cruising speed.
They also reckoned that a 4.7 percent jobless rate was equivalent to full employment.
Unemployment in April was 4.4 percent.
A major drop in the stock market and a big reversal in consumer and business confidence
could change that, though for now that doesn’t seem likely, he added.
Indeed, the Fed might even welcome some cooling off of what until recently had been a
record high stock market, said Thomas Simons, a senior economist at Jefferies LLC.
Consumer-price inflation has slowed more than forecast in the last couple of months,
raising questions about whether the Fed remains on track to achieve its 2 percent inflation target.
Feroli said the fundamentals point to inflation resuming its upward trend, with import and
unit labor costs rising and the dollar falling.
As a result, he expects the Fed “to look past” the recent weakness in prices and raise
interest rates again next month.
Source: Bloomberg Pro Terminal
Senan Fuchedzhiev - Trader
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