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Trump confidence bounce may finally allow Fed to leave zero rates far behind
March 2, 2017 / 9:44 PM / in 8 months

Trump confidence bounce may finally allow Fed to leave zero rates far behind

CHICAGO (Reuters) - A surge in business and consumer confidence during President Donald Trump’s first weeks in office has helped push the Federal Reserve toward its first sustained series of interest rate hikes in more than a decade, despite a dearth of firm policies from the administration.

FILE PHOTO: Federal Reserve Governor Jerome Powell attends the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 28, 2015. REUTERS/Jonathan Crosby

An address by Fed Chair Janet Yellen here on Friday will cap a week in which Fed policy makers lined up behind the mantra that rates can rise “soon,” with a quarter-point increase in March now firmly in play.

“The case for a rate increase for March has come together,” Fed Governor Jerome Powell said in a CNBC interview on Thursday.

A more than 10 percent jump in equity markets since the November election is adding to household wealth, a good omen for continued household spending. Consumer confidence is at a 15-year high and officials at the 12 regional Federal Reserve banks report businesses are ready to invest, addressing one of the remaining gaps in the recovery from the 2008 financial crisis.

Expectations play an important role in how monetary policymakers view the world, and the surge in optimism may explain why so many Fed officials this week piled on to the idea of raising interest rates in March.

Investors now see a March hike as an 80 percent probability. Significantly, investors are also pricing in two more rate increases this year - a rare case in the Yellen era of markets concurring with the Fed’s own view of its likely actions.

Yellen’s three-year tenure at the Fed has been dogged by the economy’s painfully slow recovery from recession and just two rate rises, a year apart. A March increase, followed by two more hikes in 2017, would enable the Fed to finally break free of the abnormally low interest rates that defined the financial crisis and that still hamper the central bank’s ability to manage the economy.

FEWER HEADWINDS, STEADIER DATA

It isn’t all about Trump. Unemployment under President Barack Obama fell to a level that many policymakers consider full employment and the economy has continued adding jobs at a strong clip - momentum Trump inherits. Household income jumped by record levels in 2015 after a long stagnation, and manufacturing is expanding.

Other headwinds that Yellen and her colleagues insisted would eventually dissipate have indeed begun to clear, including the drag on inflation from a 2014 skid in energy prices.

Fed officials across the spectrum have acknowledged that November’s election appears to have repaired some of the damage to business confidence suffered since 2008, with businesses and investors rallying around the possibility of looser-touch government and lower taxes.

In remarks on Wednesday night in which she agreed rates could rise soon, Fed Governor Lael Brainard, a veteran Democratic official who has been among the most concerned about the possibility of renewed economic weakness, said that “increased optimism could lead to faster growth in consumption and business investment.”

THE POLICY UNKNOWNS

It could all sour. The central bank does not have much from Trump in terms of 3conomic policy to put into its models. There is no guarantee, given the influence of deficit hawks in Congress, that Trump will get to roll out increased infrastructure spending on the trillion-dollar scale he has proposed.

Some of the grander ideas may have little influence in the short run. A tax cut for business offset by a tax hike in imports, St. Louis Fed President James Bullard said this week, could change investment patterns over time, but might not raise growth today.

“But that medium-term uncertainty is not enough to paralyze the FOMC and keep it from acting now as data on the labor market, financial conditions, and inflation come together,” investment bank Morgan Stanley said in a research report published on Wednesday.

“The economy appears to be at a transition,” Brainard said on Wednesday. “Risks to the outlook are as close to balanced as they have been in some time.”

Reporting by Howard Schneider; Editing by David Chance and Leslie Adler

Our Standards:The Thomson Reuters Trust Principles.
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