Market participants are preparing for the Federal Reserve to raise its forecasts for interest-rate hikes when it releases its Summary of Economic Projections this week. Rather than focus on the projections themselves, pay attention to the risks they imply. Is the Fed more likely to raise rate expectations further as the year progresses, or will policy makers back down to the three rate hikes projected last December? In recent weeks, the Fed has signaled that the former is more likely than the latter.
The case for a gradual removal of financial accommodation remains largely intact. Firmer inflation in recent months gives the Fed confidence that it will meet its 2 percent target within the next year. And the Fed is also fulfilling the other part of its dual mandate: Unemployment is holding steady at 4.1 percent even as job growth picks up steam along with the broader economy. The additional workers arising from increasing prime-age labor force participation both prevent further unemployment declines and, with stagnant wages, undermine claims that the economy is at or beyond full employment.