Most experts say Fed will raise rates, but not all agree that it should

There are relatively few reports on the nation’s business calendar this week, but even if the schedule were heavier, most economy watchers still would focus most of their attention on the Federal Reserve.

There are relatively few reports on the nation’s business calendar this week, but even if the schedule were heavier, most economy watchers still would focus most of their attention on the Federal Reserve.

We’ll get the November reading on the Consumer Price Index — economists expect no increase in inflation — on Tuesday, and the November report on housing starts Wednesday (the forecast is for them to rise 7.3 percent, to a seasonally adjusted annual pace of 1.13 million, with building permits declining 1 percent, to 1.15 million) and industrial production, which is expected to have fallen 0.3 percent in November, marking the third consecutive month of decline.

Those are important reports, but trumpets won’t blare as they’re released. By contrast, the Fed’s Open Market Committee meeting on Tuesday and Wednesday is widely forecast to end with chairman Janet Yellen explaining the central bank’s first rate increase in nine years. The hike is expected to be small, but any move after such a long period will get Wall Street and Main Street talking about the changes it may bring.

The Fed is expected to announce that it is increasing the federal funds rate to a range of 0.25 percent to 0.5 percent from its long-standing range of zero to 0.25 percent.

Business Insider said every major market economist it follows expects a rate increase, but not all of them think the central bank should take that step.

"Do I think it is the right policy move? No. Do I think that data is there? No," Stifel’s Lindsey Piegza told Business Insider. "But do I think we will see a 25-basis point increase move, based on the Fed giving in to market expectations, and the schedule is set."

Business Insider said Zach Pandl and Jan Hatzius of Goldman Sachs, in a note to clients, say they look for the Fed to announce important revisions to its outlook if it approves an increase.

"If the FOMC raises rates [this] week, the post-meeting statement will require a thorough rewrite,” Pandl and Hatzius said. “We expect three main changes. First, we expect the committee to upgrade its description of the labor market in light of firmer payroll growth. Second, we expect the statement to remove some of its relatively cautious language on inflation, while continuing to emphasize that inflation will remain a key determinant of the policy outlook. Third, we look for the statement to show a clear baseline for additional rate hikes—it will not signal 'one and done.’ ”

The Wall Street Journal said more than half of 65 economists it surveyed believe it is somewhat or very likely that the Fed’s benchmark federal-funds rate will be back near zero within the next five years even if the central bank raises it at this week’s meeting.

The Journal said any of several factors could force the Fed to reverse course and cut rates again: a shock to the U.S. economy from abroad, persistently low inflation, some new financial bubble bursting, or lost momentum in a business cycle. At 78 months, the current one is already longer than 29 of the 33 expansions the U.S. economy has had since 1854.

The Journal said the Fed has never started raising rates so late in a business cycle, but that its decision to keep rates so low for so long probably helped the economy grow enough to bring the jobless rate down to 5 percent last month. It was 10 percent in 2009.

Owners of small businesses such as restaurants worry about the possible effects a rate increase would have.

“It’s scary when you hear that the government is planning to slow things down,” William Harris, who tapped his retirement savings to open A-Town Pizza, a Neapolitan pizzeria, in the Denver suburb of Aurora, told the New York Times. “We live on people’s extra money. That’s the money they spend on pizza. And it still feels very fragile.”

The Fed appears to now be worrying that inflation will rise too quickly if it does not begin to raise rates, but such a decision has risks. An increase could spook the financial markets, lead to a slower economic recovery and make it harder for workers to press for higher wages. For savers, it could signal higher returns, but those borrowing to buy a house or a car may soon have to pay more.

USA Today reports that Morgan Stanley expects Fed policy-makers to raise rates and say in a post-meeting statement that further rate increases will hinge on a pickup in inflation, not simply confidence in the prospect of inflation accelerating. The firm expects Fed officials to slightly lower their inflation forecast for 2016 and 2017 and trim their estimate of the federal funds rate to 1.3 percent at the end of next year.

Economist Kathy Bostjancic of Oxford Economics agrees in the USA Today report that Yellen will stress the gradual pace of rate increases in her news conference, but she doesn't expect such language to be added to the statement.

"You don't want to reinforce expectations for very low rate hikes into the future," she says.


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