WASHINGTON—It’s not about what it will do. It’s about what it will say.
The worst-kept secret in the financial world is that the Federal Reserve is all but sure to raise interest rates from record lows by a modest quarter point on Wednesday, Dec. 15.
On that, pretty much everyone agrees. The uncertainty hinges on what the Fed will say about how much and how fast it expects to raise rates again in coming months. A relatively aggressive pace would contribute to higher borrowing rates and risks slowing the economy. It could also roil financial markets.
It isn’t the message investors want to hear. They'd prefer for the Fed to signal that it foresees a slow and gradual series of rate hikes, one that would allow it to periodically assess whether the economy was sturdy enough to withstand higher rates.
The Fed has kept its benchmark short-term rate near zero since setting it there in 2008 to help save the financial system in the depths of the financial crisis. Now, with the job market all but fully healthy, the central bank is ready to begin lifting rates toward normal levels.
Its policymakers have signaled in recent months that they foresee an incremental pace. But investors want further assurance Wednesday.
One factor that could keep the pace of hikes gradual is the absence of inflation pressures. In fact, inflation remains stubbornly below the Fed’s 2 percent target level. This has resulted from global economic weakness, falling energy prices and a strong dollar, which makes imports cheaper in the United States.
Investors will scrutinize the Fed’s statement and Chair Janet Yellen’s news conference afterward for clues to what might cause an acceleration of rate increases over the next year.
“I am worried that the stronger dollar and falling oil prices have masked some underlying inflation pressures which could surface quickly as we move closer to full employment,” said David Jones, chief economist at DMJ Advisors.
