FOMC Preview: Getting Ready for the New Regime
As the Federal Reserve prepares for its final monetary policy gathering of 2016, it will look back on a year of inactivity and look forward to a year that could very well be an active one. The outcome of the December meeting seems a foregone conclusion: short-term interest rates will almost certainly be increased by 25 basis points. For weeks, though, attention has turned from this month’s decision to what path the Fed might take in 2017.
The economic landscape has changed considerably since September, the last time the FOMC published forecasts and the last time that Fed Chairwoman Janet Yellen conducted a press conference. Updates by both will be offered next Wednesday afternoon. Embedded in the communications will be refreshed impressions of the current situation and expectations of how policy makers elsewhere in Washington might affect the outlook.
Here is our take on the likely content of next week’s conversations.
The U.S. economy is enjoying a fairly strong close to 2016. Early estimates for fourth quarter growth are running at about 2.6% (on an annualized basis).
These retrospective readings don’t include any allowance for the potential tailwinds that may arise in the wake of the U.S. election. Gains in the equity markets (which have been up nearly 8% since the beginning of November) and business confidence (the U.S. Purchasing Manager’s Index is at its 2016 high) may buoy activity in the quarters ahead.
Legislatively, the new crowd in Washington seems intent on tax reductions, deregulation and additional infrastructure spending. All of that would be accretive to growth, at least in the short term. (If the measures add meaningfully to the national debt, the benefit would eventually be diminished by higher interest rates or the need for higher taxes.) The contours of these programs are still under discussion, and their impact may not be fully felt until very late in 2017. Nonetheless, prospects suggest that economic growth will accelerate somewhat in the quarters ahead. With the fiscal side stepping forward, monetary policy can step aside.