The big question for Fed officials: Three rate hikes or four this year?
Three or four? Markets will be transfixed on that question this week as Federal Reserve policymakers either maintain their forecast for three interest rate hikes this year or bump it to four. Economists are divided on which way Fed officials will go.
The Fed also is expected to raise its key rate by a quarter percentage point, but that’s packing less suspense since it’s expected. Also on tap: reports on home sales and business investment.
There’s little doubt the Fed will lift its benchmark interest rate to a range of 1.5% to 1.75% at a two-day meeting that ends Wednesday. Analysts say there’s a 95% chance the Fed will act, according to CME Group. It would be the central bank’s sixth rate hike since late 2015. Several Fed policymakers have hinted they may boost their forecast for 2018 from three hikes to four amid a low 4.1% 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 hikes from three. The meeting will also be the first for Jerome Powell as new Fed chairman.
Existing home sales fell in both 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 modest 0.9% 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 support demand but rising home prices and mortgage rates have discouraged buyers, Alexander says. Builders also face shortages of construction workers and lots. After two months of declines, economists expect Commerce on Friday to announce that new home sales rose 4.6% in February to an annual rate of 620,000.
Commerce will publish its monthly tally of business orders for durable goods such as computers and factory equipment. Orders for capital goods excluding aircraft and defense — a proxy for business investment — edged down in December and January. But business fundamentals are healthy amid a resurgent global economy and oil industry. Economists expect a rebound in February with the key measure of capital goods orders rising a robust 0.8%.