admin January 16, 2016 No Comments

At last. The Federal Reserve, after holding its benchmark federal-funds rate near zero for seven years, is likely to raise it this week by a quarter percentage point. The widely expected move “will be a testament…to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession,” Chairwoman Janet Yellen said earlier this month. Looking past liftoff, the U.S. central bank will seek to shape expectations for how quickly interest rates will rise in the coming months and years. On Wednesday, the Fed will release its policy statement and updated economic projections at 2 p.m. EST, followed by Ms. Yellen’s press conference starting at 2:30 p.m. EST. Here are five things to watch.

BY  BEN LEUBSDORF CONNECT

  • Ready to Go

    There’s little suspense at this point about whether the Fed will raise rates.Atlanta Fed President Dennis Lockhart, a closely watched centrist policy maker, flatly stated last week that he’s “ready for a decision to lift off.” Private economic forecasters surveyed by the Journal see the probability of a rate increase this week at 87%. Futures markets suggest an 83% chance of liftoff as of Monday afternoon, according to CME Group. It’s hard to imagine a scenario in which the Fed would shock markets with a decision to hold rates steady.

  • Gradual Guidance

    The Fed’s mantra has been that the precise timing of liftoff matters less than the path for interest rates going forward. Many officials including Ms. Yellenhave repeatedly used the word “gradual” to describe the expected pace of rate increases, but policy makers also appear wary of committing themselvesto anything like their mechanical tightening tempo of 2004-06. Keep an eye on the policy statement and Ms. Yellen’s press conference for guidance on what will drive the Fed’s subsequent rate increases.

  • Watch the Dots

    For more clues about how quickly and how high the Fed will raise rates, check out officials’ projections for their benchmark federal-funds rate in the quarterly chart known as the “dot plot.” As of September, policy makers’ median estimate saw the rate rising to 1.375% at the end of 2016, 2.625% at the end of 2017 and 3.375% at the end of 2018, just below its normal long-run level of 3.5%. That suggested four quarter-point rate increases next year. But with U.S. inflation still running well below the Fed’s 2% annual target, officialsmight move their dots down and predict a slower pace of rate increases.

  • Out of Step

    Richmond Fed President Jeffrey Lacker has dissented at the Fed’s past two meetings in favor of raising rates. He might get his wish this time, but that doesn’t mean the decision will be unanimous. Chicago FedPresident Charles Evans and Fed governors Lael Brainard and Daniel Tarullo have all expressed reservations about raising rates and potentially could cast dissenting votes. A dissent by Ms. Brainard or Mr. Tarullo would raise eyebrows because the Fed’s Washington-based governors typically vote with the chairwoman, and none has dissented since 2005. For her part, Ms. Yellen said she “wouldn’t try to stifle dissents, and I would even expect some at critical junctures.”

  • Nuts and Bolts

    If the Fed raises its target for the fed-funds rate to a range of 0.25% to 0.50% as expected, it’ll use an array of tools to tighten monetary policy in a financial system awash with cash. The Fed has signaled that the details will be announced in an “implementation note” alongside the usual policy statement, and officials will watch closely to make sure those tools work as expected. “If adjustments to policy tools or administered rates subsequently proved necessary to implement an unchanged policy stance, the implementation note could be revised without altering the [Fed’s] policy statement,” according to the central bank’s June meeting minutes.

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