March 10, 2017 / 6:49 PM / 5 months ago

Crunch week as Fed meets on rates, Trump team joins G20

LONDON (Reuters) - After a year that tipped conventional wisdom on its head, the coming week might suggest a return to some sort of normality for the global economy -- or instead take investors into a whole new round of uncertainty.

On the face of it, Wednesday's expected interest rate hike by the Federal Reserve would be a clear sign that the United States has emerged from the shadow of the global financial crisis, a decade after it began.

As well as raising rates for the third time since the crisis, the Fed is expected to signal it will speed up its so-far tentative approach to weaning the U.S. economy off the extraordinary support of rock-bottom borrowing costs.

But of course it's not business as usual in the United States and beyond.

When the world's most powerful finance chiefs gather on Friday for the first time since Donald Trump became U.S. president, many of them will be alarmed at Washington's new, protectionist stance, which it wants other countries to endorse.

A draft communique to be argued over by the G20 has dropped the commitment to "resist all forms of protectionism". A warning against protectionism has appeared in Group of 20 communiques for more than a decade.

A diplomatic smoothing of the differences would be a relief for investors who are worried about what the Trump administration really has in store.

But if the final language of the communique suggests the Trump administration has asserted its views over those of other governments, it would raise big questions about what will happen to the open market policies that underpin the global economy.

"The G20 will be scoured for any clues as to exactly how the U.S. might be looking to pursue what looks like a more mercantilist agenda on trade policy," Brian Coulton, chief economist at Fitch Ratings, said.

By the time they meet in the German city of Baden Baden, the G20 central bankers and finance ministers will know whether there has been another political earthquake after the Trump and Brexit upsets, this time in the Netherlands.

Opinion polls have suggested that Dutch nationalist Geert Wilders' right-wing Freedom Party, which wants to take the Netherlands out of the European Union and stop Muslim immigration, has lost its lead to more mainstream opponents.

Federal Reserve Chair Janet Yellen addresses the Executives Club of Chicago in Chicago, Illinois, U.S., March 3, 2017.Kamil Krzaczynski

But polls failed to predict Trump's victory or Brexit last year and investors are nervous about a Dutch election shock just weeks before voters in France decide whether to make the anti-EU, far-right Marine Le Pen their new president.

"It will certainly be a big week," Coulton said.

FED MEETING TOPS BUSY WEEK FOR CENTRAL BANKS

As well as the Fed's meeting, central banks in four other leading rich economies -- Japan, Britain, Switzerland and Norway -- are all due to deliver their latest decisions on Thursday.

The United States Federal Reserve Board building is shown in Washington October 28, 2014.Gary Cameron

None of the them are expected to follow the Fed and tighten monetary conditions. Instead, they are continuing to try to steer their economies back to normality, and in the Bank of England's case, to offset incipient signs that last June's vote to leave the EU is starting to weigh on consumer spending.

Yet for all the political upheaval of the last nine months, which began with the British EU referendum, many economies are enjoying their best growth in years.

Even in the euro zone, confidence is at a six-year high, the services and manufacturing sectors are growing and unemployment is at its lowest since 2009, prompting European Central Bank President Mario Draghi to declare victory over deflation.

Against the backdrop of a world economy that is picking itself up and strong momentum at home, the question for the U.S. Federal Reserve is not whether to raise interest rates on Wednesday but how quickly it should do so again.

Economists at AXA Investment Managers said a sharp upgrade of the Fed's economic growth projections next week could cause investors to price in even more U.S. rate hikes than the three currently expected for 2017.

Fitch's Coulton said investors should get ready for a different pace of action at the Fed. "We will probably see the second rate hike in three months. It took eight years to get the previous pair of hikes," he said.

But James Pomeroy, global economist at HSBC, said he expects only two Fed rate hikes this year, beginning next week, as core inflation remains below 2 percent, wages grow slowly and emerging economies feel the strain of a stronger dollar which will weigh on global growth.

"Although at this meeting it's all very clear that they are going to be raising rates, and the jobs data suggests that the economy is in pretty good health, we think going forward it becomes harder and harder to go it alone and be the only central bank raising rates," Pomeroy said.

Editing by Catherine Evans

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