US likely to hike rates by 25 bp this week

Mar 13, 2017 (LBO) – The United States is likely to hike interest rates by 25 basis points on Wednesday to prevent chances of the economy overheating, although President Trump and his economic advisers are keen on building economic steam.

“On Wednesday, the Fed plans to make a first move in the direction of restraint. The central bank has all but announced that it will raise its benchmark interest rate at the conclusion of a two-day meeting of its policy-making committee,” the New York Times reported.

Based on Fed Fund Futures, there is an 88.6 percent probability of a 25 basis point hike in interest rates on Wednesday, analysts say.

Last Friday, the U.S. February nonfarm payrolls report showed that 235,000 jobs were added, far stronger than median estimates.

For the new administration, the strong February jobs report was a cause for celebration. For the Federal Reserve, it is a sign that the time had come to raise interest rates.

Trump and Janet L. Yellen, the Fed’s chairwoman, appear to be headed toward a collision, albeit in slow motion, the New York Times reported, as Trump has said repeatedly that he wants faster growth.

“The move itself is minor. The rate is expected to remain below 1 percent, and interest rates on consumer and business loans will still be remarkably low by historical standards.”

“But the Fed is moving months earlier than markets had expected at the beginning of the year, precisely because the economy appears to be gaining steam.”

Both Fed officials and independent economists are quick to emphasize that the central bank is not trying to pre-empt the new administration’s policies.

Fed officials estimate the economy is already growing at the maximum sustainable pace — they predicted in December that the economy would expand 2.1 percent this year, slightly faster than the 1.8 percent pace they regard as sustainable.

Growth above the sustainable pace can lead to higher inflation. That, in turn, can force the Fed to raise rates more quickly, a course that often ends in a recession, analysts say.