11/18/2016
The Federal Reserve’s Looming Rate Hike Decision

The Federal Reserve’s Looming Rate Hike Decision

As the Federal Reserve prepares for its December meeting, Chairwoman Janet Yellen will testify before Congress’ Joint Economic Committee and could signal the likelihood of a forthcoming interest rate hike. Here are four things to look for:

1. December Signal
Yellen will have the opportunity to affirm recent statements from her Federal Reserve colleagues that a December rate increase is coming. After their last meeting, officials signaled that a jump in the federal funds rate was probable and they needed only a bit more evidence of an improving economy. Employers continued to add jobs at a consistent rate in October, consumer spending has increased, and annual wage gains have accelerated at the quickest pace since June of 2009.

2. Election Fallout
While Fed officials aired apprehensions about market volatility following the election, stocks have rallied on prospects that the new administration’s policies could boost economic growth. Lawmakers are interested in Yellen’s view of the market’s reaction and of how proposed fiscal policies will change the landscape. The Fed is usually reluctant to comment on legislation, but there is precedent for a signal of approval on fiscal stimulus, as officials have reiterated the need to work with Congress on methods of boosting economic growth. A surge in spending, on infrastructure, for example, could spur the Fed to raise interest rates more rapidly than they currently forecast.

3. Fed Independence
The Federal Reserve could face considerable political pressure under the new administration, as scrutiny from both the executive and legislative branches could alter the Fed’s operations and level of oversight. Yellen has warned that excessive political interference could end up harming the economy.

4. Inflation Firming
While complaints from Capitol Hill have warned that the Fed’s policies could increase inflation to dangerous levels, price increases have so far remained subdued. Recent signs of firming inflation, though, could spark new criticism of low-rate policies. In November, the Fed stated that inflation had increased somewhat in 2016 and that some investors’ expectations for inflation have risen but remain low. Yellen could offer new insight into the perceived risk of an uptick in inflation.

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