Calgary Herald

Powell has the market thinking about 4 rate hikes

- JONATHAN RATNER Financial Post jratner@nationalpo­st.com

When Jerome Powell was nominated as chair of the U.S. Federal Reserve back in November, investors took comfort in the fact that he represente­d the continuity choice in terms of policies pursued by Janet Yellen. Powell’s testimony before the House Financial Services Committee on Tuesday reinforced that view, but the market’s outlook for interest rate hikes appears to have changed slightly.

All indication­s from Powell suggest his confidence in the U.S. economy is on the rise, and inflation should climb to the Fed’s target of two per cent. The Fed chair didn’t add a fourth rate hike in 2018 to his outlook, but his comments do suggest the central bank may move again as soon as March.

Tom Porcelli, chief U.S. economist at RBC Capital Markets, expected that Powell would stop short of significan­tly altering the perceived path of nearterm monetary policy.

“While he did not overtly state such a change is looming, he certainly offered something that was pretty close to an endorsemen­t of at least an additional hike in 2018,” Porcelli said.

The Fed chair commented on how headwinds facing the U.S. economy were now acting as tailwinds, and that he is more confident that the mid-2017 bout of disinflati­on was a one-off event.

“Powell had plenty of opportunit­ies to adopt more of a wait-and-see approach,” Porcelli said. “But instead he focused largely on the positive developmen­ts that would allow for a faster pace of rate increases.”

Michael Feroli, an economist at J.P. Morgan, considers Powell’s response to a question about the median FOMC forecast for three hikes in 2018, the most notable developmen­t in his semi-annual monetary policy testimony.

The Fed chair indicated that compared to December, when those projection­s were made, incoming data indicates a strengthen­ing economy, inflation is returning to target, the global backdrop is more supportive, and fiscal policy is more expansive.

“Prior to (Tuesday), it had felt as though many observers were looking for the Fed to leave the 2018 dots unchanged at three hikes, and the 2019 dots to shift up from two hikes to three,” Feroli said. “(Tuesday’s) comments appear to open the door for others on the Committee to revise their forecast as they see fit, and that Powell himself may be inclined to look for four hikes this year.”

J.P. Morgan continues to expect four hikes in 2018, and another four in 2019, but a more pressing question is how the Fed might revise its message in the March dot plot rate projection­s.

Feroli believes the odds are now slightly in favour of the median FOMC member revising up their outlook to look for four hikes this year, and three more next year. However, there will be plenty of data before the Fed’s March meeting, so things could change.

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