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For Fed, one eye on economy, the other on Trump

U.S. financial markets have little doubt that Federal Reserve policymakers will boost interest rates.

U.S. financial markets have little doubt that Federal Reserve policymakers will boost interest rates when they conclude their two-day meeting in Washington on Wednesday.

Global investors are already looking to 2017 and trying to figure out how quickly the Fed could decide to enact even more rate hikes, Reuters said in a report that also notes President-elect Donald Trump has scheduled a press conference for Thursday of this week.

Reuters said the Fed probably will not talk much about rate increases that could come in 2017 until Trump shows his hand on plans he has only generally discussed about tax cuts and increased spending to improve the nation’s infrastructure.

That said, the Fed can’t avoid taking notice of the increase in consumer confidence since Trump won the November election. On Friday, the University of Michigan’s preliminary Consumer Sentiment Index for December rose to 98.0, one-tenth of an index point below its 2015 peak.

“The surge was largely due to consumers’ initial reactions to Trump’s surprise victory,” Richard Curtin, chief economist for the university’s Surveys of Consumers, said in a statement.

“When asked what news they had heard of recent economic developments, more consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys. To be sure, an equal number volunteered negative judgments about prospective economic policies, but the frequency of those negative references was less than half its prior peak levels, whereas positive references were about twice its prior peak.”

Curtin said the surge in confidence will put pressure on Trump and his incoming administration to deliver the growth the public is seeking.

“The most important implication of the increase in optimism is that it has raised expectations for the performance of the economy,” Curtin added. “President-elect Trump must provide early evidence of positive economic growth, as well as act to keep positive consumer expectations aligned with performance. Either too slow growth or too high expectations represent barriers to maintaining high levels of consumer confidence.”

On Wednesday this week, only hours before the Fed announces its interest-rate decision, the Commerce Department will release its retail sales report for November. Those numbers should show whether consumers’ upbeat mood after the election translated to increased spending as the holiday season began.

Economists’ consensus forecast for the Fed is that the central bank will increase its target range for the federal funds rate by 0.25 percent, to 0.75 percent.

“We expect the Fed to hike rates … and we look for their interest-rate forecasts for 2017 and beyond to be little changed from their last forecasts submitted at the September meeting,” says JPMorgan economist Michael Feroli, according to a report by Yahoo Finance.

“More generally, we think the main takeaway to come out of this week’s meeting will be the sense that the [Federal Open Market Committee] believes it’s too soon to say how the outlook has changed. Indeed, most Fed speakers since the election have indicated they are not going to guess how fiscal policy or other aspects of federal economic policy will change, but that instead they will only revise their forecasts once there is some true clarity on these aspects of the outlook.”

On Thursday, after the Fed decides what it will do, economy watchers will get the monthly report on inflation from the Department of Labor. The consensus forecast is that the Consumer Price Index rose 0.2 percent in November and that core CPI, which strips out volatile food and energy costs, also rose 0.2 percent.

On Friday, the housing market weighs in with reports from the Commerce Department on housing starts and building permits for November. The consensus is that starts were at a seasonally adjusted annual pace of 1.25 million, down from 1.32 million in November.

Both reports are too late to affect the rate discussion this month, but the inflation report, in particular, could press the central bank in the months to come if it appears that prices for consumer goods are starting to rise quickly.

Meanwhile, amid signs of growth in the economy and hopes for Trump, stocks keep rising. The Dow Jones industrial average and Nasdaq composite index ended last week at all-time highs.

“The market reflects optimism about the future for economic growth, but the Fed is going to be overly cautious of latching on to that reality,” Tom Simons, an economist at Jefferies in New York, told MarketWatch.

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