Even though a quarter-percentage point rate hike is a “virtual lock” at the this week’s Federal Reserve Open Market Committee meeting, there is enough suspense to keep investors on the edges of their seats.
Fed Chairman Jerome Powell will chair his first interest-rate policy committee meeting on Tuesday and Wednesday. At the end of the meeting, the U.S. central bank will issue a rate decision, policy statement, an updated forecasts on the economy and the path of interest rates at 2 p.m. Eastern. Powell will follow with his first press conference at 2:30 p.m.
Here are the five thing Fed watchers will examine in determining the Fed’s stance.
The stock DJIA, -1.35% and in particular the bond market is likely to move on its assessment of the Fed’s viewpoint. “The fate of the bond market is in the hands of the FOMC,” said Thomas Simons, economist at Jefferies.
How much does the Fed upgrade the economic outlook given the fiscal policy moves?
The economy seemed on solid ground late last year, and then Republicans decided to add some extra fiscal stimulus in the form of lower taxes and higher spending. Fed officials didn’t know the true extent of the stimulus in the last forecast round in December, but they still did mark up their forecasts for 2018. That might happen again at this meeting. “Brace for another upgrade of the likes we saw in December,” said Michael Gregory, deputy chief economist at BMO Capital Markets. That means the Fed might lower their unemployment rate forecast, already at 3.9% and raise their expectations for core inflation, which is now at 1.9% The Fed could also move up their growth forecast. At the moment, the central bank is forecasting a 2.5% annual growth rate this year.
Will the Fed forecast 4 rate hikes this year?
In the last forecast round in December, the median Fed forecast looked for three hikes this year. Most economists see the Fed sticking to this forecast but others think the odds tilt in favor of the outlook increasing to four hikes. “The difference between a four 2018 hike median and three 2018 hike median is probably going to be one vote,” said Simons of Jefferies. Blake Gwinn, a strategist with NatWest, said the 10 year Treasury note TMUBMUSD10Y, +0.74% already has some possibility of a move to four priced in.
Read: What to expect from the new Fed dot plot on interest rates
Any changes to the Fed statement?
Economists don’t see sweeping changes to the statement because the January statement already took a sharp turn toward optimism. The Fed will repeat that inflation “will move up this year.” Michael Hanson, head of global strategy at TD Securities, said one big change would be if the Fed decided to upgrade the near-term risks to the economic outlook that it said were “roughly balanced” in January. He suggested the Fed would instead say: “Near-term risks to the outlook have improved due to recent fiscal policy changes and improving global growth
Powell’s first press conference
Economist are eager to see Powell’s initial press conference and expect him to expand on his view that “headwinds have become tailwinds.” Richard Moody, chief economist at Regions Financial Corp, said the press conference “should shed light on Powell’s approach to sending messages to the market.” Analysts said there was an outside chance Powell announces a press conference at every meeting. Hanson of TD Securities said the market would view that as sharply hawkish.
Any mention of the balance sheet?
The Fed is slowing shrinking the size of its balance sheet, building to a pace of $50 billion per month drawdown by the end of the year, but Simons of Jefferies said there seems some dissatisfaction about the pace. He noted Kansas City Fed President Esther George recently suggested the slow pace of balance sheet run-off could be contributing to a buildup in various financial imbalances. This could be a topic for the press conference, or the minutes of the meeting to be released on April 11.