The US Federal Reserve was due to open a two-day monetary policy meeting on Tuesday but is widely expected to leave the key interest rate untouched after raising it twice so far this year.
Markets instead will be watching for any signals about another possible rise in the benchmark lending rate in 2017, and on when the Fed will begin winding down its multi-trillion-dollar investment holdings — something that could have a similar effect as a rate hike.
Unemployment has moved steadily downward since the start of 2017 to a very low 4.4 percent, but wage gains have remained sluggish and price pressures have actually retreated in the first half of the year, leaving economists dumbfounded.
The Fed has repeatedly said the weakness in inflation should be “transitory,” and cited one-off explanations such as falling prices for mobile telephone plans and prescription drugs as factors.
As of Tuesday morning, futures markets were growing marginally more confident that the Fed will go ahead with a third rate increase by December.
Still, the odds were 47 percent, or a little less than half the betting money, that the next rate hike will not happen until 2018.
University of Oregon economist Tim Duy wondered whether policymakers would “continue with the mantra that the weak inflation data mostly reflects simply a series of unusual shocks,” or decide the weakness is more persistent.
“It has gone on long enough that the latter is becoming increasingly possible.”
But with the Fed under no immediate pressure to act, policymakers are likely to adopt a wait-and-see posture.
“I think one of the reasons we’ve seen so little wage pressure is that there is continued slack in the labor market,” said Randall Kroszner, a former Fed governor.
The Fed is anticipating that steady job creation and low unemployment will at last cause inflation to kick in, and push towards the two percent target down the road.
However, Kroszner said, “Probably they will want to see a little more evidence before taking the next step on the interest rate increases.”
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