WASHINGTON (BLOOMBERG) - Like everyone trying to figure out where the US economy is heading, the Federal Reserve is waiting to see what the whirlwind of executive orders and remarks from President Donald Trump mean for growth as they weigh the timing of the next interest-rate hike.
US central bankers left their benchmark lending rate unchanged on Wednesday (Feb 1) and used their statement to acknowledge that sentiment has gained, and that inflation will rise to their 2 per cent target even with "gradual" adjustments in interest rates. They weren't impressed by the fourth-quarter bounce-back in business investment and continued to term it "soft."
"The Federal Reserve acknowledged the boost in sentiment on the part of consumers and businesses, but were not certain enough about the outlook to signal a rate hike was a strong possibility in the near future," Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York, said in an e-mail.
Investors see a roughly one-in-three chance the Fed will raise rates by a quarter percentage point at their next meeting, on March 14-15, with the odds of an increase rising to around 70 per cent by their June meeting, according to pricing in federal funds futures markets.
In his first days in office, Trump has rolled out executive orders on immigration and regulatory reduction. He's announced the US will pull out of the Trans-Pacific Partnership, and signed a memorandum to revive the Keystone XL pipeline. Infrastructure spending and tax reform are also on his agenda.
Just what it all means for growth going forward is still hard to see.
Cheryl Bachelder, the chief executive officer of Popeyes Louisiana Kitchen, told analysts last month that there is "genuine optimism" about the future stemming from the election that's "yet to become real."
"That's what to watch in 2017," she added. "It's the things people are optimistic" about that could "turn into truth."
Here some upcoming indicators both executives and policy makers will keep an eye on: Feb 3: January payrolls report. Central bankers are counting on continued gains in the labour market to strengthen compensation and support progress toward their 2 per cent inflation target. Economists expect employers added 175,000 jobs.
Feb 14-15: Fed chair Janet Yellen delivers her semi-annual testimony to Congress. This will give investors a view of her outlook that could reinforce the sense that she's on board with raising rates three times this year.
Feb. 22: Minutes of Jan. 31-Feb. 1 FOMC meeting released. The description of the internal policy debate could signal how officials are thinking about Trump policies and the risks to their outlook.
March 1: PCE (which stands for personal consumption expenditures) inflation release for January. U.S. central bankers judge they can raise rates gradually to stay ahead of inflation. They need modest gains in prices to keep that strategy in place. Officials want to see headline PCE at 2 percent. It rose 1.6 percent in the 12 months to December.
The Fed provided little direction in the statement Wednesday on when it might next raise rates. Policy makers in December penciled three hikes into their 2017 forecasts, but committee members differ over assumptions about how much tax cuts, spending increases and regulatory rollbacks proposed by the new administration will boost growth and inflation.
Surveys of consumers and businesses have indeed shown significant increases in optimism for the economy following Trump's Nov. 8 win. The University of Michigan's gauge of consumer sentiment rose last month to a 13-year high, while the National Federation of Independent Business's index of small-business optimism soared in December by the most since 1980.
"Sentiment going up is positive for the economy, but sentiment can be ephemeral," said David Berson, chief economist at Nationwide Insurance in Columbus, Ohio, who expects the FOMC will raise rates two or three times in 2017. "The committee needs to see it translated into tangible increases in spending by consumers and businesses" to move three times, he said.
-With assistance from Steve Matthews and Matthew Boesler To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net, Jeanna Smialek in Washington at jsmialek1@bloomberg.net, Christopher Condon in Washington at ccondon4@bloomberg.net. To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Randall Woods ©2017 Bloomberg L.P.
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