US Central Bank Expected to Raise Interest Rates Slightly

Twice in the past three months, Federal Reserve chair Janet Yellen has made a point of insisting that t h e Federal Open Market Committee has not been too slow in raising interest rates.

Still, some market watchers are urging investors to be cautious of how rising interest rates may come into play.

Wall Street ended higher on Friday but the S&P 500 and the Nasdaq snapped a six-week winning streak as worries about valuations and the lack of detail on President Donald Trump's policy proposals threw a wrinkle in a post-election rally.

The Federal Reserve is expected to announce a quarter percentage point interest rate increase at the end of its two-day meeting today.

"If the economic outlook evolves in line with our economists' expectations, we are likely to see the Fed members guide the markets towards a faster pace of hikes than is being now discounted over the medium-term", analysts from Goldman Sachs said in a note. "Builders continue to face a number of challenges, including rising material prices, higher mortgage rates and shortages of lots and labor".

The Federal Reserve is raising interest rates for the third time in 15 months, after pushing them close to zero during the financial crisis and keeping them there for nearly seven years. Net interest income totaled about $46 billion previous year.

For the dollar, Fed fund futures prices show investors price in more than a 90 percent chance of an increase in official US interest rates on Wednesday and the market's attention is now firmly on the scale of tightening further out. Almost eight years after the Great Recession ended, the economy seems less and less to need the support of ultra-low borrowing rates. Investors will be watching out for clues if the Fed could become more aggressive as the economy shows signs of improvement.

During the presidential campaign, Trump accused Yellen of keeping interest rates artificially low for political reasons, and said he would seek to replace the Obama appointee before her term expires. The feedback loop between fiscal stimulus and tighter monetary policy is fairly straightforward: the combination of reduced taxes and increased government spending will lead to deficits; deficits tend to push up inflationary pressures; and with inflation already at or above the Fed's +2% medium-term target, any policy that pushes up inflationary pressures even more will necessitate a faster pace of rate hikes.

For Mr Faust and others, the conversation is now focused on whether the Federal Reserve, when it releases new economic forecasts this week, could even raise its forecast for rate rises also. But the central bank's so-called dot plot, which represents policy makers' expectations for future rate moves, is likely to take center stage.

Farmer said the Fed's rate increase will hit auto loans quickly.

Fed officials stress that the dot plot is merely a projection of where rates might go and not at all a guarantee. They haven't benefited much from the Fed's first two rate increases and won't now unless they work at it, McBride said. The bank can lend your money out, but the rate of interest it receives at the present time is also low, so they have not been able to generate strong profits. With Yellen's new outlook for the rate hike, Trump praises her yet again.

"We're very close to achieving our dual mandate goals", San Francisco Fed President John Williams said on February 28 in Santa Cruz, California.

  • Zachary Reyes