Federal Reserve Chair Jerome Powell’s Fed is widely expected to raise U.S. interest rates this week and signal that the central bank will raise rates more times in 2018 than it called for last year.
The majority of major Wall Street firms, including Barclays, JP Morgan, Goldman Sachs and UBS among others, are expecting the Fed to call for four increases to U.S. interest rates in 2018 when it concludes its policy meeting on Wednesday.
At its most recent meeting, the Fed signaled it would raise rates just three times in 2018, and Fed fund futures rates show the market has priced in three hikes this year as well.
Economists and rate strategists at these firms say that the increased fiscal spending from the administration of President Donald Trump should kickstart growth and inflation, speeding up the Fed’s pace of tightening.
“The main change was the additional fiscal spending agreed to by Congress, the Bipartisan Budget Act, which raised caps for spending $300 billion,” Vassili Serebriakov, FX Strategist, Credit Agricole, told Yahoo Finance. “That’s going to boost GDP growth to close to 3% this year, so that’s probably the main underlying theme.”
(The market is almost unanimous in its expectation for an interest rate increase of target U.S. overnight interest rates from 1.25-1.50% to 1.50-1.75% this week, with CME Group’s Fed Watch tool showing a 92% likelihood.)
Even the doves are expecting tighter monetary policy
Additionally, the Fed’s so-called doves – policymakers who favor letting inflation rise in order to keep unemployment low – appear to be onboard with a faster pace of increases this year, the economists say. And they say that Powell showed his hand a bit during his congressional testimony in February, where he appeared to signal four increases to the U.S. overnight interest rate were on their way.
“Public remarks by Fed officials suggest a broad shift in the committee’s outlook towards a potentially faster pace of tightening, and we expect the median dot to show four hikes in 2018, up from three at the December meeting,” Goldman Sachs analysts said in a note to clients.
Analysts also noted that they are expecting a more hawkish tone from Powell and the Fed in their communication following the meeting.
Even institutions that don’t expect an additional rate hike to be put on the Fed’s so-called dot plot this week say they see the Fed increasing its long-term outlook, meaning higher interest rates are coming, whether sooner or later.
Investors are braced for it
RBC Capital Markets economists said that a survey of clients, which includes institutional investors and market participants of various stripes, showed that while only 20% said they expect an additional rate hike to be signaled Wednesday, the majority (52%) expected they would shift at some point this year. That means nearly 3/4 of clients expect a shift in the dots in 2018.
“In other words,” RBC economist Tom Porcelli wrote, “even if they still think four hikes is aggressive, it would appear they are braced for it.”
Holding with that view, Marc Chandler, chief global currency strategist at Brown Brothers Harriman, said he thinks the all-but-certain rate increase at Wednesday’s meeting to be sufficient for Powell to communicate his intent to get the Fed on a faster rate-hike path.
“By hiking rates at his first meeting, Powell would brandish his ‘hawkish bias,'” Chandler said. “To also indicate a fourth hike would be overkill.”
Analysts from UBS and Morgan Stanley also noted that they expect the Fed to call for post-meeting press conferences after all of its eight meetings. The analysts said they expect the change, up from four press conferences now, to be announced this year and for the change to take place next year.