The central bank is poised to raise rates but a weaker economy might put more action on hold
The Federal Reserve building in Washington, D.C. as shown on Aug. 1, 2015. Photo: Karen Bleier/Agence France-Presse/Getty Images
The facts have changed. Will the Federal Reserve change its mind?
There is no such thing as a sure thing, but a Fed rate increase next week is close. Officials at the central bank have made it clear they plan to lift their target range on overnight rates, and futures markets are putting the odds at better than 90% that a move will be made at the meeting that concludes June 14.
But when Fed policymakers look beyond next week, they will have to consider a few inconvenient facts. First, even though unemployment is low, wage growth remains weak, and inflation has cooled. Second, the economy remains stuck in a slow-growth rut. And third, the chances of near-term tax cuts and fiscal stimulus, which could provide a meaningful economic boost, have fallen.
That is the message not just from the data and the headlines, but from the market. The yield on the 10-year Treasury note on Tuesday slipped to its lowest in more than a half-year – an indication that bond investors have downgraded their growth and inflation expectations.
None of these developments are likely to prevent a rate increase next week, but they could prompt the Fed to rethink its projected rate increases through next year and its plan to begin winding down its balance sheet.