Economists expect faster Fed rate hikes this year

WASHINGTON

The Federal Reserve likely will leave the benchmark US interest rate untouched next week, but economists said the changing composition of the policy committee could point to faster rate hikes in 2018.

Markets are betting the first of the three interest rate moves expected this year will come at the Fed's next meeting in March.

That will allow the Fed's interest-rate setting body, the Federal Open Market Committee (FOMC), to wait for firmer signs of inflation, which has long run below the Fed's 2 per cent target.

But changing economic conditions - the tax cuts approved last month, recovering energy prices, a weaker US dollar, new trade tariffs and stronger global growth - could combine with US labour shortage to spur wage gains and cause demand-driven rise in inflation, analysts said.

Also, the changing make-up of the FOMC appears to be leaning in a more hawkish, inflation-averse direction, which raises chances of the committee raising the rates four times.

The 12 presidents of the regional Federal Reserve banks rotate as voting members of the FOMC each year, along with members of the Fed Board of Governors who always vote.

Chicago Fed president Charles Evans and Minneapolis president Neel Kashkari, who both opposed last month's rate hike, will not vote this year.

But Cleveland's Loretta Mester, who twice dissented in favour of higher rates in 2016, will become a voter. She will be joined by San Francisco's John Williams, a centrist and ally of outgoing chair Janet Yellen, and the Atlanta region's newly appointed Raphael Bostic, who is an unknown but pegged as a dove by analysts at IHS Markit.

Mr Thomas Barkin, who took over this month as president of the hawkish Richmond Fed, will also be voting for the first time.

This week's meeting will be Ms Yellen's last, and once she steps down at the start of next month, US President Donald Trump is in a position to stack the Fed's Board, with the chance to name all but one of its seven members.

Mr Jerome Powell, who will take over as chair, has servedwith Ms Yellen since 2012, and is unlikely to depart too easily from the path she charted, having supported her post-crisis policy of cautious rate increases.

University of Oregon economist Tim Duy said the Fed would do well to avoid overreacting by raising rates more than three times, saying: "They will need to be wary of the long and variable lags in the policy process; they will need to take time to see the impact of their past tightening.

"So I think you need further evidence of excessive inflationary risks before they ratchet up the pace of increases."- AFP