The Federal Reserve this week will likely reinforce a theme that has cheered consumers and investors since the start of the year: No interest rates hikes are likely anytime soon.
The prospect of continued low rates is keeping borrowing costs low for households and companies. It is helping drive record highs in the stock market. It is supplying fuel for a U.S. economy that's growing steadily but fairly modestly and until recently was seen as facing the risk of a recession. And with inflation remaining unusually mild, the Fed is seen as able to stay on the sidelines through year's end and perhaps beyond.
The Fed will likely express that belief in a statement when its latest policy meeting ends Wednesday and in a news conference that Chairman Jerome Powell will hold afterward.
"The Fed will recognize the brighter economic outlook, but there will be no change at this meeting," said David Jones, an economist and author of books about the Fed.
The generally brighter view of the economy and the stock market represents a sharp rebound from the final months of 2018, when concerns about a possible global recession and fear of further Fed rate increases had darkened the economic picture. Stock prices tumbled in the final quarter of the year, especially after the Fed in December not only raised rates for the fourth time in 2018 but suggested that it was likely to keep tightening credit this year.
Yet beginning in January, the Fed engineered an abrupt reversal, suggesting that it was finished raising rates for now and might even act this year to support rather than restrain the economy. In characterizing its stance, the Fed's new watchword became "patient." And investors have responded by delivering a major stock market rally.
The market gains have also been fed by improved growth prospects in China and some other major economies and by the view that a trade war between the world's two biggest economies, the United States and China, is moving closer to a resolution.
On Friday, the government reported that the U.S. economy grew at a surprisingly strong 3.2% annual rate in the January-March quarter. It was the best performance for a first quarter in four years, and it far surpassed initial forecasts that annual growth could be as weak as 1% at the start of the year.
If economic prospects were to brighten further, could Fed officials rethink their plans to suspend further rate hikes and perhaps resume tightening credit?
Possibly. But investors don't seem to think so. According to data tracked by the CME Group, investors foresee zero probability that the Fed will raise rates anytime this year. And in fact, their bets indicate a roughly 64% likelihood that the Fed will cut rates before year's end.
One factor in that dovish view is that the economy might not be quite as robust as the latest economic figures suggest. The first quarter's healthy 3.2% annual growth rate was pumped up by some temporary factors — from a surge in restocking of companies' inventories to a narrowing of the U.S. trade deficit — that are expected to reverse themselves. If so, this would diminish the pace of growth and likely hold down inflation.
"We are still confronting a global slowdown, with 70% of the global economy slowing," said Diane Swonk, chief economist at Grant Thornton.
Indeed, for all of 2019, growth is expected to total around 2.2%, down from last year's 2.7% gain, as the effects of the 2017 tax cuts and billions of dollars in increased government spending fade.
At the same time, the Fed is still struggling to achieve one of its mandates: To produce inflation of roughly 2%. On Monday, the government reported that the Fed's preferred inflation gauge rose just 1.5% in March from 12 months earlier. Many analysts say they think the Fed won't resume raising rates until inflation hits or exceeds its 2% target.
Too-low inflation is seen as an obstacle because it tends to depress consumer spending, the economy's main fuel, as people delay purchases in anticipation of flat or even lower prices. It also raise the inflation-adjusted cost of a loan.
"They will express concerns about the low inflation numbers," Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles, predicts of Fed officials this week.
Sohn foresees a roughly 50-50 chance that the Fed will end up cutting rates before year's end, at least in part over concerns about low inflation.
President Donald Trump and Larry Kudlow, head of his National Economic Council, have urged the Fed to cut rates. Last week, Trump asserted that annual economic growth would have reached 5% last quarter, instead of 3.2%, had the Fed provided rates as low as the ones that prevailed during the Obama administration, when the economy was recovering from the devastating 2008 financial crisis.
In recent months, Trump tapped two conservative political allies for vacancies on the Fed's influential board in hopes that they would push for lower rates and counter the influence of Powell, whose leadership Trump has repeatedly attacked. One of them, Herman Cain, has since withdrawn. But the other, Stephen Moore, is aggressively campaigning for the board seat despite criticism of his qualifications and sometimes inflammatory writings. As recently as December, Moore was publicly calling for Trump to try to fire Powell.
Most analysts say they think Powell will stick to his public position that the Fed will keep pursuing its goals of maximum employment and stable inflation without regard to outside influence.
"This pressure will not affect the Fed's decisions, but it does undermine confidence in the Fed, and that sets a dangerous precedent," Swonk said.