Anticipation over rate hike forecast tops economic news this week
Three or four?
Markets will be transfixed on that seemingly trivial question this week as Federal Reserve policymakers either maintain their median forecast for three interest rate increases this year or bump it up to four.
Economists are divided on which way Fed officials will go. The Fed is also expected to raise its key rate by a quarter percentage point, but that’s packing less suspense because it’s expected. Also on tap: reports on new- and existing-home sales and on business investment.
There’s little doubt the Fed will lift its benchmark interest rate to a range of 1.5 percent to 1.75 percent at a two-day meeting that ends Wednesday. Analysts say there’s a 95 percent chance the Fed will act, according to CME Group. It would be the central bank’s sixth rate increase since late 2015, when it began shifting away from the near-zero rates it put in place during the 2007-09 recession.
Several Fed policymakers have hinted they might boost their forecast for 2018 from three increases to four amid a low 4.1percent unemployment rate, a surging global economy, and federal tax cuts and spending increases that will further juice the economy.
Nomura economist Lewis Alexander believes policymakers’ median forecast will rise to four, but Morgan Stanley predicts it will stay at three, while the projection for 2019 shifts to four increases from three. An outlook for more aggressive increases could spook markets because higher rates tend to shift investments from stocks to bonds. The meeting will also be the first for Jerome Powell as new Fed chairman.
Existing-home sales fell in December and January. Although solid job and income growth have fueled demand, housing supply shortages have crimped purchases. Economists expect the National Association of Realtors to report a relatively modest 0.9 percent increase in existing-home sales last month to a seasonally adjusted annual rate of 5.43 million.
New-home sales are similarly caught between conflicting forces. The sturdy labor market and strong consumer confidence are supporting demand, but rising home prices and mortgage rates have discouraged some buyers, Alexander said. Builders also face shortages of construction workers and lots. After two months of sharp declines, economists expect Commerce on Friday to announce that new-home sales rose 4.6 percent in February to an annual rate of 620,000.