Fed expected to bump the cost of money higher Wednesday

Last week’s stronger-than-expected jobs report “seals the deal for an increase in the federal funds rate” when the Federal Open Market Committee finishes meetings on Tuesday and Wednesday, economist Gus Faucher told clients at PNC, the largest bank based in Pennsylvania, in a report Monday.

The Fed will likely boost rates to between 0.75 percent and 1 percent, Faucher added, given “solid job growth,” more employers hiring, and people rejoining the labor force and seeking jobs — coupled with signs of higher wages and higher prices.

“It's too early" to thank the new Trump administration for an improved economy, because “few actual policies have changed” so far. But clearly “businesses are feeling more positive,” he added. 

Futures markets “are pricing in a virtual 100 percent certainty of a rate increase” inasmuch as employment and prices are “very close” to Fed targets, James M. Meyers, principal at Tower Bridge Advisors in West Conshohocken, told clients of brokerage Boenning & Scattergood in a report Tuesday.   

The Fed’s rate statement and forecasts, due Wednesday, are heading a little more “hawkish” — toward rising rates — agreed analysts Brian Gardner and Michael Michaud at Keefe Bruyette & Woods in New York.

That’s a result, not so much of a change of heart, as a head count: Given the vacancies on the interest panel for top Fed officials in Washington and Wall Street — which tend to support the cheap money that makes traders and speculators rich — the balance of power is shifting temporarily toward regional Fed presidents in Philadelphia and other cities, who have been pushing for the higher rates that stimulate local bank lenders and earn them higher profits, the Keefe analysts added.

They suggested taking President Trump’s first draft budget, also due this week, “with a grain of salt," given the long congressional approval process and political battles ahead — though the market could “overreact” in the short term, Gardner and Michaud concluded. 

“This week it gets real,” said Tom Siomades, head of the Radnor-based Hartford Funds Investment Consulting Group, a $78 billion money manager.

The strengthening economy will push the Fed toward managing inflation by boosting interest rates so “the economy does not overheat,”  Siomades predicted.

He, too, urged investors not to take Trump’s first budget too seriously: “The initial budget will be a window into the soul of this administration” — but “after all the horse trading is done, the budget will look much different,” he concluded.

“Tighter” interest rates have already been “broadly signaled to the markets,” agreed Tony Bedikian, managing director of global markets at Citizens Bank.