Will the Fed Soon Signal Four Hikes in 2018? Don't Bet on ItBy
Lifting the dot-plot’s median would require a dramatic shift
No need to push investors with March and June hikes priced in
U.S. inflation is perking up. And just like that, commentators are speculating the Federal Reserve may raise interest rates more times than the three moves they’ve penciled in for this year.
So, when they gather in Washington next month, how likely is it that policy makers will add another hike to their dot-plot of quarterly interest-rate projections in 2018?
Not very likely. It would take a dramatic shift in the dots, carrying almost all of the centrists on the Federal Open Market Committee, to move the median forecast for the group up a notch.
In their December projections for the dot-plot, only four officials said four or more hikes will be appropriate in 2018. To lift the median, four additional colleagues would have to join them -- bearing in mind the group will drop from 16 to 15 due to the departure of former Chair Janet Yellen on Feb. 3.
Yellen was probably among the six officials who in December forecast three moves. The rest of that group, according to Bloomberg’s analysis, are probably Chairman Jerome Powell, Governor Randal Quarles, San Francisco President John Williams, New York’s William Dudley and Dallas President Robert Kaplan.
It’s not impossible, but quite a stretch to think four of them would upgrade their projections for their March 20-21 policy meeting on the basis of January’s faster-than-projected consumer price data, which was released Wednesday.
“They’ll have to rejigger their forecasts a bit, and that should lead eventually to a steeper path of policy,” said Michael Gapen, chief U.S. economist at Barclays Plc in New York. “Whether that’s enough to move the median in March is probably a tall order.”
For starters, Fed officials are loath to react to anything less than a clear trend change. A couple of bullish reports in wage and inflation data that are notoriously volatile and subject to revision do not a trend make.
Also recall that when they projected three hikes in 2018, officials were already incorporating an expectation that inflation would move up smartly in 2018. Why change your projection if the underlying forecast is simply proving accurate?
One more reason: Markets are already expecting rate increases in March and June. That puts four hikes well within reach by the end of the year. So, if an FOMC member is inclined to raise his or her projection from three to four, there’s really no urgency to do so now.
With investors on-side, it makes more sense to keep options open for either three or four, unless the FOMC wants market participants to begin thinking about the possibility of five moves in 2018. That doesn’t seem likely at this early stage of the year.