Federal Reserve to Decide on Further Rate Hikes at Wednesday Meeting

This coming Wednesday, May 2, the Federal Reserve Open Market Committee (FOMC) is going to decide at 2pm ET on whether or not to continue course with further rate hikes. The majority of economists believe that the Fed will keep rates at current levels of 1.75%, although that decision may hinge on how the Fed reads new higher inflation data. According to ECI data, worker compensation is rising at the fastest level since 2008. Inflation has picked up steadily so far this year, likely well on track to reach the Fed’s 2% goal. Additional tailwinds to rising inflation may include tariffs imposed by the U.S. and China as well as rising oil prices. 

This meeting is coming on the heels of Donald Trump’s criticism of Fed policy two weeks ago, which targeted the U.S.’s continued rate hikes on the basis that they undermined a cheap dollar policy. Trump’s cheap dollar policy has been a source of disagreement, with some in his cabinet such as Larry Kudlow critical of the policy. In Feburary, Steve Mnuchin’s explicit voicing of the cheap dollar policy sent the dollar index to 3 year lows and preceded a vague backtracking by the administration.

Despite backtracking,the general consensus from the administration is that a cheap dollar policy is a boost for American industry and allows American firms to stay competitive with foreign exporters. This runs contrary to data which shows that under Trump, current account deficits are worsening, even with a declining dollar. Trump’s preferences for cheap money may come at odds with the Fed’s goal of unwinding post-recession stimulus, as contractionary monetary policy meets a contradictory expansionary fiscal policy. 

The coming FOMC meeting should set the tone for the coming year’s rate hikes as well as preview whether Fed policy comes at odds with the White House’s agenda.