Trump pressures Fed before meeting, warns against 'another mistake'

Jermaine Castillo
December 19, 2018

Will the Fed raise rates for a fourth time in 2018? But beyond that, the Fed's plans are shrouded in uncertainty. Some economic indicators-including USA economic growth and employment-are healthy and tilt the scales towards a rate increase. It will, in other words, tailor its rate policy more to the latest economic barometers and less to any preset course of steadily tightening credit.

"We see the December (Fed) meeting producing a dovish hike, where the Fed further affirms a shift to a nimble regime, while also shifting its projected hiking path and economic projections downward", wrote the BNP Paribas economics team in a note to clients. But this time, risks to the economy appear to be rising.

"Don't let the market become any more illiquid than it already is".

But this week, in the view of many analysts, the central bank could indicate that no more than two rate hikes are likely next year.

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In a November speech, Fed Chairman Jerome Powell signaled fresh flexibility in how the Fed sets interest rates but didn't say policy makers' economic outlook had changed.

One way it would do so would be in its so-called "dot plot". However, the US economy grew an annualized 3.5% in the third quarter, unemployment is now at a 50-year low, and inflation is near target.

Brian Rehling, co-head of global fixed income strategy at the Wells Fargo Investment Institute, is also hesitant to sound the alarm on liquidity, arguing that the Fed is only in the early stages of normalization and is leaving "plenty of money" in the system. The Fed has indicated it intends to continue gradually raising rates toward a neutral setting. This would suggest that the Fed might raise rates less frequently. Powell will speak at a news conference at 2:30 p.m. That is the level at which the Fed's key rate is thought to neither stimulate the economy nor hinder it. Rates are now in the range of 2% to 2.25%.

Instead, the more probable scenario on Wednesday would beto deliver a dovish rate hike. A slowing economy - or a recession - could damage Trump's re-election efforts in 2020.

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Since then, though, a weakening in global growth has become more pronounced, posing a risk to the US economy. From China to Europe, major economies are weakening.

"China, the European Union and others have been manipulating their currencies and interest rates lower, while the United States is raising rates while the dollars gets stronger and stronger with each passing day-taking away our big competitive edge", Trump said in a Twitter post on July 20. He foresees just one rate increase in 2019.

Unemployment remains at an nearly 50-year low and growth is expected to be around 3 percent this year, well above the 2 percent that the Fed thinks is normal for the US economy. Among the factors depressing the market are the Fed's rates hikes.

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