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Fed: What to watch for? – Charles Schwab

Barring a major surprise, the Federal Reserve’s policymaking committee looks set to raise its benchmark short-term interest rate by another quarter of a percentage point this week, in the face of strong economic growth, steady inflation and falling unemployment, according to analysts at Charles Schwab.

Key Quotes

“It would be the first of at least three rate hikes currently forecast for 2018 and the sixth of the Fed’s rate-hiking cycle, bringing the federal funds rate to a range of 1.5%–1.75%.”

“Some of the implications for investors.

The economy and rates

  • The Fed’s mission is to keep the economy in good health by using its money tools to promote employment and keep prices stable. So how are things going?
  • Pretty well, or at least well enough for the Fed to continue gradually pushing its policy settings back toward normal after more than a decade of having to support an economy weakened by the financial crisis. Employment has been growing and the unemployment rate falling. Normally, that would raise the risk of surging inflation, but wage growth has been moderate enough to help keep prices rising at a very mild rate.
  • Meanwhile, the recently passed tax cuts and Congressional deal to boost spending are likely to add more stimulus to the economy, potentially boosting inflation. And the prospect of tariffs on metal imports and other potential curbs on trade could help push prices of imported goods higher.
  • All things considered, the Fed’s rate-setting Federal Open Market Committee (FOMC) should be able to raise the fed funds rate several more times this year.
  • “The Fed seems determined to get the funds rate back to ‘neutral” as soon as possible, especially in light of potential inflationary impact of fiscal stimulus,” says Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research. “After several years of promising to hike rates and then backing out, this year is likely to see some follow-through.”

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