The US Federal Reserve’s two-day meeting in Washington, which ends today, will be followed by a press conference with chair Jerome Powell. While the news will likely be an expected interest rate hike, the Fed has plenty of topics to dissect. Hot in here? The US labour market is running hot, so a job market discussion is sure to be on the agenda. The committee’s 2018 unemployment projection may be destined for a revision, since it places joblessness at 3.8% by the end of the year and the data hit that level in May. But more interesting is whether officials will cut their longer-run unemployment estimate—now at 4.5%. The Fed says unemployment is already running below the level that can be sustained in the longer run, but wages are crawling higher rather than taking off. Any guidance? Forward guidance’s days are limited, according to Fed minutes and officials. As the Fed scraps the practice of pledging lower-for-longer rates, two statement sentences are in the cross-hairs. One says the “federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run", and the other explains that “the stance of monetary policy remains accommodative“. The immediate query is whether those phrases will be dropped in June, a sign that a decade of market hand-holding is coming to an end. Knocking on neutral? Any details on the coming shift from easy to tight monetary policy will definitely draw attention. In March, officials had expected to cross that threshold in 2020. Pushing limits? Fed balance sheet run-off is playing out in the background but it has begun to sneak into the foreground. The effective fed funds rate is pushing toward the top of its range, which for years has been the level of interest on excess reserves (IOER). The Fed has signalled it is thinking about setting the IOER five basis points below the top of the target range. Upward pressure could come from technical factors, but there’s a chance that it’s a sign bank reserves are getting scarce. EM vs the Fed? Fed officials have been unfailingly chill about global developments in recent months. Powell has dismissed the role of US monetary policy on foreign financial conditions as “often exaggerated". Yet as emerging markets suffer a rout, central bankers in India and Indonesia have called for Fed restraint. Against that backdrop, Powell is sure to field some globally-conscious questions. Any signs of nervousness could be a dovish signal. Subscribe to Mint Newsletters * Enter a valid email * Thank you for subscribing to our newsletter. Never miss a story! Stay connected and informed with Mint. Download our App Now! ! Topics<doc-sep>The Federal Reserve's Federal Open Market Committee (FOMC) meets this week, and another interest rate hike is widely expected. While a rate hike won't be a surprise, there are some things consumers should know. And there are some other ways the Fed could surprise the markets. Here's a rundown of what consumers and investors should know before the Fed issues its statement on Wednesday. Another rate hike is widely expected When the FOMC, the arm of the Federal Reserve responsible for monetary policy, meets later this week, it is widely expected to raise the federal funds rate by another 25 basis points. The latest futures data indicates a 91.3% chance of a rate hike, which would be the second so far this year and the seventh of the current rate-hike cycle. Aside from the Fed's own year-end target federal funds rate of 2.1%, which is significantly higher than the current target range of 1.50% to 1.75%, there are other reasons why economists believe a rate hike is a near certainty. For example, economists expect that Tuesday's inflation data will show an annual inflation rate of 2.7%, ahead of the Fed's 2% target. Even core inflation, which excludes quickly fluctuating prices like that of gasoline, is expected to be 2.2%. Other economic data has been positive as well -- such as May jobs data, which showed that 35,000 more jobs were added that month than experts had been projecting. Here's what it will mean to you As you probably know, a Federal Reserve interest rate hike tends to drive market interest rates higher. However, there's a bit more to it than that. Specifically, some interest rates move up or down in direct proportion to the federal funds rate, while others have a correlation without a direct relationship. The federal funds rate also determines the prime rate, which several consumer interest rates are based on. Credit card interest rates are a key example, and the vast majority of credit card annual percentage rates (APRs) will move in tandem with Federal Reserve rate hikes. For example, a quarter-point increase in the federal funds rate will turn a 17.24% APR into 17.49%. Home equity lines of credit (HELOCs) are also in this category. Meanwhile, other consumer loan products like mortgages and auto loans tend to have a correlation to the federal funds rate, but don't have a direct relationship. In other words, a 0.25% increase in the federal funds rate doesn't mean that mortgage interest rates will increase by the same amount. While rates on these loans tend to move in the same direction as the federal funds rate, this isn't always the case, and it's tough to predict the magnitude of any increase based solely on the Fed's actions. The rate hike itself isn't the most important thing to watch While the roughly 91% chance of a rate hike isn't a complete certainty and is actually lower than the 95% chance the market gave to a rate hike before the March 2018 meeting, it's pretty safe to assume rates will be raised. If not, it will certainly be a shock to the market. Since there's such a high probability of a rate hike, investors are already assuming it will happen. However, there are a few other things worth paying close attention to when the FOMC releases its statement: The dot plot: The FOMC releases a document known as its "dot plot," which shows where all of its directors see interest rates going over the next few years. The opinions of all of the members can then be averaged to see where the consensus lies. As of the March 2018 dot plot, the FOMC's year-end 2018 expectation was a federal funds rate of 2.1%, rising to 2.9% at the end of 2019, and then increasing to 3.4% by the end of 2020. The 2019 and 2020 projections were significantly higher than previous versions of the dot plot, so it will be interesting to see if these change again. What's in store for the rest of 2018: One of the big questions is whether we'll see three or four rate hikes in 2018. A rate hike this week would make two, and the dot plot could help clarify whether the FOMC sees another one or two hikes for the rest of the year. Inflation and unemployment projections: The FOMC also issues predictions for inflation and unemployment over the next few years, which can also help shape monetary policy. As of the March 2018 meeting, the FOMC saw unemployment at 3.8% at the end of 2018, falling to 3.6% at the end of both 2019 and 2020. For inflation, the FOMC in March saw 1.9% inflation this year, followed by 2% next year, and 2.1% in 2020. The Fed's balance sheet: In the aftermath of the financial crisis, the Federal Reserve built up a $4.5 trillion balance sheet by buying Treasuries, which it has since started to unwind. Reports indicate that the Fed may decide to end this unwinding sooner than expected, which could signal an earlier-than-expected end to this rate hike cycle. Regardless of the exact details, any updates or announcements regarding the balance sheet reductions could certainly move the markets. It's all about projections With another interest rate hike a near-certainty, the real story later this week will be the Fed's projections, its views on the economy, and any revelations about the balance sheet unwinding. Any deviations from the projections made at the March meeting are likely to move the market, so be sure to pay attention.<doc-sep>
The Federal Reserve could have a surprise in store for investors this week, even if everyone already knows the central bank is raising interest rates. Along with the quarter-point increase in the Fed's benchmark short-term target, the policymaking Federal Open Market Committee is likely to announce another change that would signal an early exit from its history-making program to reduce the level of bonds being held on its balance sheet. The mechanics are a little complicated. Yet it suggests that what once appeared to be an operation to shrink the amount of bonds the Fed owns that would have run well into the next decade could be wrapped up next year, or early 2020 at the latest. Instead of reducing the balance sheet from its peak of $4.5 trillion to $2.5 trillion or so as some Fed officials indicated, the impact could be far less — perhaps, some suggest, to $3.5 trillion or even a little more. It all depends on how tight financial markets get. Tightening in the money markets, and an unexpected push of the fed funds rate toward the high end of its target range, would be key factors in prompting the Fed to re-examine its policy normalization efforts from financial crisis extremes. If the balance sheet runoff ends sooner then anticipated, investors probably can expect that the rate-hiking cycle could wrap up a bit earlier as well. "There is a very active debate, and it's probably really going to take hold at the August meeting, about how far the balance sheet contraction should really go," said Fed expert Lou Crandall, chief economist at research service Wrightson ICAP. "It's easy to get breathless about this and say the Fed's got a crisis. On the other hand, this is revealing that there are fewer truly surplus reserves in the system than we might have thought," he added. The predicament indeed seems far from a crisis. But the upcoming deliberations will give investors a window into how the Fed will unwind the stimulus it injected to help pull the economy out of the financial crisis, and ultimately how the market will react. So far, the balance sheet reduction has proceeded with minimal market disruptions, but much work remains ahead of the central bank.