Fed’s Powell has the market thinking about four rate hikes in 2018
Upbeat tone on U.S. economy may be harbinger
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 near- term monetary policy.
“While he did not overtly state such a change is loomi ng, 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 JPMorgan, considers Powell’s response to a question about the median FOMC forecast for three hikes in 2018 the most notable development in his semiannual monetar y policy testimony.
The Fed chair indicated that compared to December, when those projections were made, incoming data indicate 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.”
JPMorgan 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 FOMC 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.
The central bank has no reason to try to surprise investors, so if there is a desire to shift the market’s expectations, we should hear a more upbeat tone loud and clear in various Fed speeches in the coming weeks.