WASHINGTON — The Washington political world is in disarray. Britain’s election tumult has scrambled the outlook for Europe. And economies in the United States and abroad are plodding along at a pace that hardly suggests robust health.
Yet when the Federal Reserve meets Wednesday, it’s all but sure to raise its benchmark interest rate for the third time in six months – a pace the Fed would normally adopt when it’s trying to slow an economy at risk of overheating.
So why the rush to keep raising rates?
Even with the economy growing sluggishly, the barometers the Fed studies most closely have given it the confidence to keep gradually lifting still-low borrowing rates toward their historic norms.
Though the Fed monitors the overall economy, its mandates are to maximize employment and stabilize prices. And hiring in the United States remains solid, if slowing, with employment at a 16-year-low of 4.3 percent – even below the level the Fed associates with full employment.
Inflation has been more problematic, having long stayed below the central bank’s two percent target rate. But Fed officials have said they think inflation, which has recently slowed further, will soon pick up along with the economy.
That said, no one expects the Fed to turn aggressive. If nothing else, the political fights and uncertainty in Washington — over investigations into Russia’s ties to President Donald Trump’s campaign, health care legislation, tax cut proposals, and about whether Congress will raise the nation’s borrowing limit and pass a new budget – could lead the Fed to raise rates more slowly than it otherwise would.
“We are looking at a very messy summer in terms of policy in general and that may cause the Fed to retreat to the sidelines for a while,” said Diane Swonk, chief economist at DS Economics of Chicago.
Uncertainty also surrounds the Fed’s policy committee’s membership. Trump is expected soon to fill three vacancies on the Fed’s influential board and those new members, depending on who they are, could alter its rate-setting policy.
Given all that isn’t known, some analysts say an additional rate hike they had expected in September, to follow the increase they foresee this week, might not happen until December.
The CME Group’s tracking gauge shows market traders see a 96 percent probability the Fed this week will raise its target for the federal funds rate – the interest that banks charge each other – from a range of 0.75 percent to one percent, to a range of one percent to 1.25 percent.
The Fed had kept its benchmark rate at a record low near zero starting in late 2008 to try to boost consumer and business borrowing, and lift the country out of the worst downturn since the 1930s. It raised the rate modestly in December 2015, then waited a year do so again. It acted again in March and has projected a total of three rate increases this year.
Fed officials have said they think the economy, now entering its ninth year of expansion, no longer needs the ultra-low borrowing rates they have been supplying. Besides stepping up its pace of rate increases, the Fed has also signaled that it’s pondering a plan to begin reducing its enormous portfolio of bonds. At the depths of the recession, the Fed began buying Treasury and mortgage bonds to try to depress long-term loan rates. That effort resulted in a five-fold increase in its portfolio to $4.5 trillion.
In a statement the Fed will release Wednesday, and in a news conference by Chair Janet Yellen to follow, officials may begin to disclose details of how they will begin to pare the bond portfolio, likely by slowing the reinvestment of maturing bonds.
Yellen, the first woman to lead the Fed, is serving a term that will end in February 2018. So far, Trump has sent conflicting signals about whether he plans to nominate her for a second term.