After stock markets powered forward (NASDAQ and Russell 2000 hit new all-time highs) and contentious trade talk continued, this week, the focus turns to the Federal Reserve. For the second time this year, policy makers are expected to raise short-term interest rates by a quarter of a percent to a new range of 1.75 to 2 percent. If so, it would be the seventh quarter-point bump since the current rate tightening cycle started in December 2015.
Since the last meeting six weeks ago, there had been some thought that the central bankers might back off a rate hike at this meeting. The rationale behind doing nothing would be that the escalating trade conflicts could stop the economy’s forward progress.
In fact, Just a week before the Fed was set to meet, the World Bank released its latest Global Economic Prospects report, which flagged the risk of tariff tiffs. World Bank chief economist Shantayanan Devarajan warned “Protectionist threats cast a dark cloud over future growth.” Additionally, there has been chatter around the rising US dollar, especially against risky emerging market currencies such as the Turkish lira and the Argentine peso, both of which are down about 20-25 percent YTD.
But the ample evidence of US growth is likely to quell those concerns. Although the economy expanded by 2.2 percent annually in Q1, it is on track to pick up in Q2 – estimates range from between 3.5 and 4 percent. With the economy expanding and price pressures building, the likelihood is for another quart-point at this week’s confab.
This is also a meeting where Fed officials will release their economic projections. Of note will be the number of rate hikes for the remainder of 2018. Most investors have penciled in a total of three for this year, but given that we are in June and the economy is gaining momentum, four could be more realistic.
One other note about the Board: there are still only three members. Nominees to fill three additional seats, Richard Clarida, Marvin Goodfriend, and Michelle Bowman, are all awaiting a confirmation vote in Congress.