Fed likely to go ahead with rate hikes

WASHINGTON • 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 normalise rates in order to rein in an economy that officials believe is growing above its potential and prevent an already- stretched labour 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 former central bank economist Jonathan Wright, who's now a professor at Johns Hopkins University.

Policymakers 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 and 14, when they will update their forecasts for the economy and interest rates.

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Traders in the money market put the odds of a rate rise next month at about 65 per cent, down from 85 per cent on May 9. They also lowered the probability of a third hike this year to well below 50 per cent.

Major US 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.

Cleveland Fed president Loretta Mester said on Thursday that financial market volatility has not affected her economic outlook.

"You have to look through those temporary fluctuations in both economic and financial data and focus on what the implications are for the medium-run outlook," she told reporters.

Fed officials have been cautious about building expectations of a fiscal policy-induced bump in economic growth into their forecasts and so may not be as worried as investors by its apparent fading prospects.

Officials in March projected that the economy would grow 2.1 per cent both this year and the next. They also reckoned a 4.7 per cent jobless rate was equivalent to full employment. Unemployment in April was 4.4 per cent.

"If the economy still looks like it's going along at 2 per cent-plus and the labour market continues to tighten, I don't see any reason for them to be deflected from the course they've been on," said Mr Peter Hooper, a former Fed official who is now chief economist at Deutsche Bank Securities.

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 per cent inflation target.

Mr Michael Feroli, chief US economist at JPMorgan Chase, said the fundamentals point to inflation resuming its upward trend. He expects the Fed "to look past" the recent weakness in prices and raise interest rates again next month.

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A version of this article appeared in the print edition of The Straits Times on May 20, 2017, with the headline 'Fed likely to go ahead with rate hikes'. Print Edition | Subscribe