The Federal Reserve will almost certainly raise interest rates on Wednesday despite pressure from President Trump not to do so.
But what would happen if the Fed didn’t raise rates?
The first thing would be that Trump would do one of those end-zone dances that I hate so much. (And if you think football players look stupid doing them, imagine how a 72-year-old president would look.)
The financial markets might also do a little jig — for a very short period of time. But when the jig is up — probably in about two hours — the markets will start worrying about the reasons the Fed so abruptly changed its mind.
- Is the economy crashing?
- Is the banking system in jeopardy?
- Has Fed Chairman Jerome Powell conceded his power to a bullying president? Or maybe the White House knows some deep dark secret about Powell and used it as leverage.
- Is there some other secret reason too horrible to imagine?
Those are the thoughts that will go through both the stock and bond market’s minds if the Fed were to surprise us by not raising rates.
Common sense and historical precedent say the Fed doesn’t want to surprise Wall Street unless there’s a reason to do so. And right now the US economy isn’t an adequate reason. It may be slowing, but it’s not crashing.
Growth is still likely to be in the low 2 percent to mid-2 percent range next year. That is about where it’s been at its peak for a decade.
And all the predictions that there will be a recession in 2020 — just in time for the next presidential election — are only guesses or wishful thinking by Democrats.
Nobody knows how the US consumer is going to behave over the next two years. And the consumer holds the key to the US economy.
So, on Wednesday you can expect the Fed to raise the federal funds rate by one-quarter of a percentage point to 2.5 percent. That rate — which influences but doesn’t control other borrowing costs — was raised by the same amount to 2.25 percent in September.
The betting now is that the Fed will raise rates only one more time in 2019, not the three times that was previously expected. But nobody really knows if that’s true, either.
But the committee will probably also lower its economic forecast and hint that it will go easy on rate hikes next year.
That should boost stocks — maybe by a lot — for a short time, especially since this is the end of the year and also one of those triple options expiration weeks when traders try desperately to boost stock prices.
Trump said Monday that it’s “incredible” that the Fed was “even considering” a rate hike. And the more the president says things like that on Twitter, the harder it will be for the Fed to slow down rate hikes without looking like a puppet of the White House.