The third rate hike of the year would lift the fed funds rate by 25 basis points to a range of 2%-2.25%. Also, it would be the eighth time the Federal Open Market Committee raises borrowing costs since it started in late-2015; it held rates near zero after the Great Recession to speed up the economic recovery.
Short-term interest rates are most affected by Fed decisions. That means rates on things like credit cards will rise soon after Wednesday. Mortgage rates are on the rise, but strong demand for housinghas meant that the impact is still minimal. Savers should also see their interest rates increase, although banks tend to lift these slower than they do for borrowers.
Wednesday’s Fed decision is not about the expected rate hike, however. It’s all about what Fed officials including Chairman Jerome Powell say about the future of the US economy and interest rates.
The voting FOMC members will release a new projection for where they see rates over the next two years and in the long run, known as the dot plot. TheirJune dot plot indicated three rate hikes next year and one in 2020, raising questions about what happens afterwards.
Some economists are urging the Fed to be even more patient with hiking because short-term rates could soon tip over longer-term ones, which are normally higher. The yield difference between 2 and 10-year Treasurys shrank to an 11-year low of 21 basis points last week; a so-called yield-curve inversion happens when it goes negative, and is used as a recession signal.
The Fed’s statement will likely strike a bullish tone on the economy yet again; the labor marketis near full employment, jobless claims are at a 48-year low, and consumer confidenceis at an 18-year high.
But as with interest rates, the forward-looking statements will be most interesting.
For one, we’ll get a our first look at the Fed’s projections for 2021.
Also, when Powell holds a press conference starting at 2:30 p.m. ET, he’ll likely be asked about the risks of atrade warto the economy. He downplayed the threatduring Congressional testimony in July, but President Donald Trump has since imposed tariffs on an additional $200 billion worth of Chinese goods, and threatened to impose duties that would cover half of all imports from the world’s second-largest economy.
Powell may also be asked to respond to Trump’s criticismof the Fed’s rate hikes.
“On Wednesday, our team expects Powell to highlight the growing upside risks to the economic backdrop, downplay the potential impact of tariffs on the economy, and dodge any questions on the politicization of the Fed,” said Lori Calvasina, the head of US equity strategy at RBC Capital Markets, in a preview.
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