Fed, in shift, may move to increase pace of rate hikes

Inflation within reach of policymakers target

The Federal Reserve, which has struggled to stoke inflation since the financial crisis and up until now raised interest rates less frequently than it and markets expected, may be about to hit the accelerator.

On Wednesday, the US central bank is almost universally expected to raise its benchmark interest rates, a move that just a few weeks ago was viewed by the markets as unlikely.

And with inflation showing signs of perking up, Fed policymakers may signal there could be more than the three rate rises they have forecast for this year.

“They do not have as much room to be patient as they did before,” said Tim Duy, an economics professor at the University of Oregon, who expects Fed policymakers to lift their rate forecasts this week.

Policymakers have their eyes on achieving full employment and 2- percent inflation. The faster the economy approaches those goals, Duy said, the quicker the Fed will want to tighten policy to avoid getting behind the curve.

“That’s an acceleration in the dots,” he said, referring to forecasts published by the Fed that show policymakers’ individual rate- hike forecasts as dots on a chart.

The economy already appears closer to its goals than the Fed had expected in December, the last time it released forecasts. The jobless rate, at 4.7 percent, is below what policymakers see as the long- run norm, and inflation, at 1.7 percent, is in the range they had expected by year’s end.

With an interest rate hike this week by the Fed fully priced in, markets are focused on any clues from the US central bank about the pace of future rises.

“On one hand, the market ponders a surprise hold, in which massive unwinding of positions could take place with the hike already priced in,” Jingyi Pan, market strategist at IG in Singapore, wrote in an note.

“On the other hand, concerns have also been paid to an acceleration in the Fed’s path to normalization, where the likelihood of four Fed hikes has been raised, up from the current projection of three,” she said. “The immediate reaction is likely to be seen in the dollar and upsides towards December’s high on the dollar index may be eyed.”

The dollar index was 0.2 percent higher at 101.49, extending Monday’s gains following a bout of profit taking at the end of last week.