Business Monday

Patience and prudence tested at the Federal Reserve

Federal Reserve Board Chair Janet Yellen speaks during a meeting of the Commonwealth Club on Jan. 18, 2017 in San Francisco. The Fed raised its target short-term interest rate at its last meeting in December and signaled that it expected to gradually raise rates this year.
Federal Reserve Board Chair Janet Yellen speaks during a meeting of the Commonwealth Club on Jan. 18, 2017 in San Francisco. The Fed raised its target short-term interest rate at its last meeting in December and signaled that it expected to gradually raise rates this year. AP

The Trump economic era may be underway, but as far as the Federal Reserve may be concerned, it’s steady as she goes in the week ahead. But beyond that, it may not be as certain as it has been.

The central bank prides itself on its responsiveness to the national economy. Policymakers aren’t shy about changing tactics in order to work toward its two mandates of stable prices and maximum employment. That flexibility could be tested as it confronts an emboldened president with little patience for past ceremony.

The Fed raised its target short-term interest rate at its last meeting in December and signaled that it expected to gradually raise rates this year. In the week ahead, the group meets for the first time since that decision. It is doubtful the bank will hike its interest rate at this two-day meeting. However, how the Fed characterizes its outlook with fiscal uncertainty growing will push the limits of its comfort zone.

In two weeks, President Donald Trump is expected to unveil his budget proposals. It’s expected to include tax cuts, new national security investments and billions of dollars of new spending on infrastructure like bridges, tunnels and roads. It’s likely to include some budget cuts, but not enough to make up for his spending appetite. How he proposes to pay for his plans will determine how much money the federal government would have to borrow and add to the national debt.

The Fed is watching for more government borrowing that doesn’t add sustainable economic growth. Earlier this month, Federal Reserve Governor Lael Brainard warned that new government spending that only encourages consumer spending (e.g. tax cuts) “enacted when the economy is near full employment and two percent inflation are relatively… more likely to be accompanied by increases in interest rates.”

Full employment and 2 percent inflation closely describe the current national economy, which is why the Fed is interested in slowly and carefully raising rates. The coming Trump economic plan may challenge that plan.

Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.

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