Fed's Next Rate Move Splits Economists Looking Past March FOMC

Kingwest CIO: Why the Fed Needs to Raise Rates
  • Fed to hold rates steady at March 15-16 policy meeting
  • Survey predicts the Fed's dot plot to show three hikes in 2016

The great American jobs machine keeps humming and inflation is finally stirring to life. Still, economists are split over how aggressively the Federal Reserve will signal its next interest-rate move when policy makers meet on March 15-16.

Economists surveyed by Bloomberg see the central bank holding rates unchanged next week and 55 percent predict the Fed will also echo the language of its January statement that officials were “assessing” global economic and financial developments. That would be viewed as signaling less likelihood of a hike at their April meeting.

“That balance-of-risk stance has become part of their forward guidance,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York.

The Federal Open Market Committee will publish its policy statement at 2 p.m. Wednesday, together with updated quarterly economist forecasts and projections of the expected path of policy. Chair Janet Yellen will hold a press conference at 2:30 p.m.

‘Nearly Balanced’

About 27 percent of 44 economists surveyed March 4-8 said the officials will upgrade their outlook to “nearly balanced,” which would likely focus investors’ attention on June’s FOMC meeting. Some 16 percent said the Fed will acknowledge recent solid readings in U.S. economic data and state the risks are “balanced,” leaving April on the table for an interest rate move.

A similar range of views probably exists among the FOMC, judging from recent public comments. Fed Governor Lael Brainard has warned about a global slowdown and said on March 7 that risk management “argues for patience as the outlook becomes clearer.” Vice Chairman Stanley Fischer noted in remarks the same day that the U.S. economy “may well at present be seeing the first stirrings” of inflation, a trend that Fed officials will welcome.

“The labor market is in a better position, some of the dollar strength has moderated, and perhaps oil has found a bottom,” said Michael Hanson, senior global economist at Bank of America Corp. in New York. “I suspect there is going to be a healthy debate and not a clear resolution to the inflation question.”

Consumer Confidence

Despite weaker growth abroad, consumer spending is solid and monthly payroll gains have averaged 235,000 over the last six months, pushing the U.S. to the Fed’s goal for maximum employment. Progress has also been made on the inflation side of its dual mandate. The personal consumption expenditures price index, which the Fed targets at 2 percent, rose 1.3 percent year-over-year in January, after 13 months below 1 percent as energy prices fell.

The median estimate of economists in the Bloomberg survey was for only two rate hikes this year, in June and December. Still, economists also anticipate that Fed officials’ own updated quarterly projections will signal three hikes in 2016, down from four when the Fed’s so-called dot plot was published in December.

The challenge for Yellen and her colleagues is to convey that this gradual path of policy tightening remains intact without spooking investors and provoking a sharp tightening in financial conditions which could harm the economy.

Risk Management

The March meeting “is about risk management, it is about a pause, it is about wait and see,” said Laurence Meyer, president of LH Meyer Inc. and a former Fed governor. At the same time, policy makers will signal that they intend to raise interest rates again in June, he said.

“The Fed statement does that with just a somewhat more optimistic tone,” Meyer said.

Economists surveyed said the probability of a June rate hike was 42 percent, with April at 15 percent and March at 12 percent. The survey also showed that economists predict the Fed has room to raise rates at a gradual pace.

Average hourly earnings will rise above the 3 percent level on a year-over-year basis when the unemployment drops into a range of 4 percent to 4.5 percent, according to 55 percent of survey respondents. U.S. unemployment was 4.9 percent in February and average hourly earnings rose 2.2 percent from a year earlier.

Nor was there any threat seen from inflation. When asked in which quarter the PCE price measure will show a third consecutive month of readings at the Fed’s 2 percent target or higher, 33 percent of respondents said not until the fourth quarter of 2017 or later.

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