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Fed Poised to Raise Rates Wednesday 09/26 06:26

Fed Poised to Raise Rates Wednesday    09/26 06:26

   The Federal Reserve is set Wednesday to raise interest rates for a third 
time this year and possibly modify the likely direction of rates in the months 

   WASHINGTON (AP) -- The Federal Reserve is set Wednesday to raise interest 
rates for a third time this year and possibly modify the likely direction of 
rates in the months ahead.

   The big question is whether the strong U.S. economy, which has been fueled 
this year by tax cuts and increased government spending, could weaken next 
year, especially if President Donald Trump's trade fights begin to inflict 
damage and the benefits of tax cuts start to fade.

   If the Fed finds that prospect likely, it might signal Wednesday that it 
expects to slow its rate increases next year.

   The Fed's key short-term rate -- a benchmark for many consumer and business 
loans -- now stands in a range of 1.75 percent to 2 percent after two 
quarter-point increases in March and June. A similar rate hike Wednesday would 
raise that range to a still-low 2 percent to 2.25 percent.

   Many analysts expect the economy to eventually weaken, in part from the 
effects of the conflicts Trump has pursued with China, Canada, Europe and other 
trading partners. If the economy should slow sharply in 2019, the Fed might 
decide to pull back on its rate increases to avoid hampering growth too much. 
In that scenario, it might raise rates only twice in 2019 and then retreat to 
the sidelines to see how the economy fares.

   Some analysts, though, say they think the momentum built up from the 
government's economic stimulus will keep strengthening the job market and 
lowering unemployment -- at 3.9 percent, already near a 50-year low. A tight 
job market could accelerate wages and inflation and prod the Fed to keep 
tightening credit to ensure that the economy doesn't overheat.

   Any light the Fed might shed on those questions could come in the statement 
it will make after its latest policy meeting ends, in updated economic and rate 
forecasts it will issue or in a news conference that Chairman Jerome Powell 
will hold afterward.

   The modest rate increase that's widely expected reflects the continued 
resilience of the U.S. economy, now in its 10th year of expansion, the 
second-longest such stretch on record. Most analysts expect the Fed to signal 
that it plans to raise rates a fourth and final time this year, presumably in 
December. The Fed's rate increases typically lead to higher rates on some 
consumer and business loans.

   Should neither Powell nor the Fed itself clarify expectations for the months 
ahead, it could be because the policymakers are sharply divided and are 
coalescing into two familiar opposing groups -- "hawks" and "doves."

   Doves focus on the Fed's mandate to maximize employment and worry less about 
inflation. Hawks tend to concern themselves more with the need to prevent high 
inflation. One Fed board member, Lael Brainard, a leading dove, earlier this 
month surprised some with a speech that emphasized her belief in the need for 
continued gradual rate hikes.

   By its latest reckoning, the Fed estimates its "neutral rate" -- the point 
where it's thought to neither stimulate nor restrain growth -- at around 2.9 
percent. Two more hikes this year and two in 2019 would lift the Fed's 
benchmark rate to that level.

   Many economists worry that Trump's combative trade policies could 
significantly slow the economy next year. Trump insists that the tariffs he is 
imposing on Chinese imports, to which Beijing has retaliated, are needed to 
force China to halt unfair trading practices. But concern is growing that China 
won't change its practices, the higher tariffs on U.S. and Chinese goods will 
become permanent and both economies -- the world's two largest -- will suffer.

   Powell has so far been circumspect in reflecting on Trump's trade war. The 
Fed chairman has suggested that while higher tariffs are generally harmful, 
they could serve a healthy purpose if they eventually force Beijing to 
liberalize its trade practices.

   In the meantime, economists are divided over how many Fed rate increases are 
likely in 2019. The projections range from as few as two to a total of four.