All eyes on Wall Street are on the Fed this week as the governors convene for their monthly meeting. Another hike in the Fed's benchmark interest rates is presumed to be in the offing, despite a narrowing of the spread between yields of long and short term bonds continues to narrow. When short-term rates exceed those with longer terms, that's considered a reliable indicator of recession, at least in normal times. Are these times, however, normal? The Wall Street Journal reports:
The Fed seems all but certain to raise its target range on overnight rates by a quarter point for the second time this year on Wednesday. There is a good chance it ups its estimate for total rate increases for 2018 from three to four.
The Fed’s last set of projections, in March, showed that policy makers on balance expected to raise rates three times. But nearly half of them reckoned on four rate increases, and the unemployment rate has since fallen from 4.2% to 3.8%, which is where policy makers thought it would be at end the year. Inflation has gotten a bit warmer.
The difference between three and four rate increases may not matter much to investors, who expect rates to keep rising next year. But it matters a lot for the yield curve, which is edging closer toward inverting, the situation where short-term rates are higher than long-term rates. That is a longstanding signal that a recession is coming.
