Rate hike expected as Fed resumes policy meeting

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The US Federal Reserve Wednesday resumed its policy two-day policy meeting, as markets remained convinced the third rate hike of the year will be announced later Wednesday.

With signs of inflation mounting, albeit gradually, as the economy continues to grow and unemployment is flirting with historic lows, economists say the arrows are all nudging policymakers to stick with their plan of steady rate hikes.

With another increase in December also seen as a virtual certainty, the open question is what signals the Fed may send about the path of monetary policy next year.

John Williams, a long-time central banker and the newly-installed president of the New York Federal Reserve Bank, earlier this month said the United States was experiencing a “goldilocks economy,” meaning the Fed only needed to raise rates gradually.

Since the Fed’s last meeting, job creation and GDP numbers have shown robust health, wages have risen and inflation has firmed, while measures of industrial activity and the housing market are among the few that have softened.

But analysts say the central bank is tangling with a complex set of near-term economic questions, including a trade confrontation with China affecting hundreds of billions of dollars in goods that is likely to be inflationary; tax cuts and fiscal stimulus late in the economic recovery; and dizzyingly high asset prices alongside more or less stagnant wage growth.

Some incoming Fed members have signaled they may soon favor raising the key lending rate high enough to start to restrict the economy, pushing it above the estimated “neutral” rate.

Diane Swonk, chief economist at Grant Thornton, told AFP policymakers face a tricky task in determining what the neutral rate is.

“We know it’s a moving target. In a stronger economy, it should move up,” she said.

Though they have said President Donald Trump’s trade policies pose a risk to the economy, central bankers are unlikely to be heavily critical, Swonk added.

She cited the example of the Bank of England’s remarks on Brexit as a cautionary tale.

“They came out very negative before it was even voted on,” she said.

“They were seen as premature and it undermined their credibility and it put them in a very uncomfortable position politically.”

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