Federal Reserve officials are likely to raise short-term interest rates when their two-day meeting concludes Wednesday, the only increase this year and just the second since June 2006. But what will they signal for the path of rates in 2017 and beyond? This will be the Fed's first policy meeting since the election of Donald Trump, who has pledged tax cuts and new government spending—policies that could affect the Fed's outlook for inflation and interest rates over time. The central bank releases its policy statement and economic and interest-rate projections at 2 p.m. EST Wednesday, and Chairwoman Janet Yellen holds a press conference at 2:30 p.m. Here are five things to watch for.
Plotting the Dots
Officials' projections for their benchmark federal-funds rate in the quarterly chart known as the "dot plot" will be scrutinized for clues about where rates could be heading next year. At their September meeting, officials implied they expected two quarter-percentage-point rate increases in 2017. But that was before Mr. Trump's victory. Economists surveyed by The Wall Street Journal last week see the pace of Fed interest-rate increases picking up in the coming years for a variety of reasons. Several Fed officials, however, have said they won't change their outlook until they see what fiscal policies are enacted, suggesting their dots won't move much this week.
Another thing to watch in the dot plot is officials' long-term expectation for the fed-funds rate. The median of that projection fell to 2.9% in September from 3.50% a year ago, reflecting the belief that the natural rate of interest—the inflation-adjusted overnight rate that is consistent with the economy operating at full potential without overheating—has fallen in the years since the financial crisis. If it keeps declining, that would be a sign of Fed pessimism about the potential for growth in productivity and economic output.
Full Employment
The summary of economic projections will be examined for details of Fed officials' predictions for the unemployment rate at the end of 2017, which could be lower than their September prediction of 4.6%, since that rate was reached last month.
A question facing Fed officials now is: What is full employment—the lowest level the jobless rate can fall to without pushing inflation higher—and are we there yet? Unlike inflation, for which the Fed and several other global central banks have set a 2% target, there is no fixed goal for maximum employment. If officials judge the economy has reached full employment, that could suggest a quicker pace of rate increases ahead to keep inflation in check.
Ms. Yellen told Congress in November that the economy has had "more room to run" than officials had anticipated, indicating she wasn't worried the economy was at risk of overheating.
Wording the Statement
If the Fed does raise rates, it might tweak its policy statement slightly, compared with the one released in November, including dropping language saying the case for a rate increase had "continued to strengthen." Officials' recent comments suggest they are likely to repeat their expectation of "gradual" rate increases. Fed officials often include a line in their statement assessing the risks to their economic outlook. They said in November that the near-term risks to the outlook were "roughly balanced," and could repeat that Wednesday.
Fiscal Policy Implications
During her postmeeting press conference, Ms. Yellen is likely to field questions about the implications of expansionary tax and spending policies for the path of interest rates. In her comments to Congress in November, she said there is "a great deal of uncertainty" surrounding the fiscal outlook. One of her close allies, New York Fed President William Dudley, said last week that the tightening of financial conditions since the election in expectation of tighter Fed policy "seems broadly appropriate," although he added that "it is premature to reach firm conclusions about what will likely occur."
Watch for Dissents
Ms. Yellen faced dissent at five out of seven meetings this year, each time from officials who wanted to push rates higher. If the Fed raises rates, Ms. Yellen might get dissent from policy makers with the opposite concern—those who favor keeping rates low. If governor Lael Brainard, an advocate of low rates, were to dissent, she would become the first governor to vote against a rate decision since Mark Olson in September 2005.
Write to Harriet Torry at harriet.torry@wsj.com
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