By now, everyone knows the Fed wants to hike interest rates Wednesday, but what is not known is what central bank officials think about future rate increases this year.
Friday’s strong jobs report was the whipped topping on a parfait of strong indicators for the Fed. In the coming week, February retail sales and the consumer price index will both be important, but the Fed already has above-trend job growth of roughly 235,000 in both January and February, and hourly wage gains of a respectable 2.8 percent.
The Fed is expected to raise the fed funds target range by a quarter point, which would put it between 75 basis points and 1 percent. That move would directly impact short-term borrowing costs, but the Fed’s rate moves are like a domino effect and will send even longer-term rates higher. Those rates affect everything from car loans to mortgages, and commercial loans.
When the central bank unfurls it’s new forecasts Wednesday, the market will be looking to see if there’s an adjustment in its collective interest rate outlook, which now points to three quarter-point rate hikes this year. The market has looked skeptically at these forecasts since the Fed began 2016 with forecasts pointing to four hikes, and ended the year with just one rate rise in December.
But in recent weeks, Fed officials mobilized a campaign to tell the markets it’s time to hike and they could move in March, while expectations were for a June rate increase and then possibly one other this year. The market got on board with a March hike and is warming up to three increases for 2017.
Now, with the Fed seeing fresh labor market strength and signs of inflation picking up, officials may feel even more confident about moving forward with the hiking cycle.
“I think the risk of four rate hikes went up dramatically,” said Diane Swonk, CEO of DS Economics, after Friday’s strong February jobs report. Hiring was broad-based and the biggest sector was construction with 58,000 new jobs. But even with the strong hiring, GDP in the first quarter looks sluggish, forecast at under 2 percent.
“It’s been the quantity of jobs, outpacing the quality of jobs. We’re now seeing some jobs come about in manufacturing and construction. It looks like GDP has some issues with seasonality in the first quarter. That has been an ongoing issue. It’s the volume of jobs versus over overall job growth. Now we’re finally seeing some good jobs come back in manufacturing and construction … we’re finally getting wage acceleration and that’s what the Fed wants to see,” said Swonk.
Fed officials will provide new economic forecasts and their “dot plot,” which is their individual interest rate forecasts, anonymously plotted on a chart. That currently shows expectations for three hikes this year.
“I think the odds have to favor more dots, favoring more rate hikes, rather than fewer,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. Chandler said the dollar could weaken early in the week due to technical selling, but the Fed may spark gains. “Maybe it’s going to be a hawkish hike finally.”
“I think the market is underestimating the hawkishness of the regional Fed presidents,” said Chandler. “Why shouldn’t the Fed raise rates once a quarter this year. … With the employment number and the other readings on the economy, the economy is not fragile. Some of the words they’ve used are more confident on the economy.”
Bank of America Merrill Lynch equity strategist Dan Suzuki said the stock market can tolerate the idea of one or two more Fed rate hikes.
“In the near term, the commentary and the dot plot could drive a short-term movement in the market, but I wouldn’t think it’s going to be the spark of a long lasting sell-off in the market, given the macro backdrop is very supportive. But that doesn’t mean you couldn’t get a 1 percent down move on the day, if [Fed Chair Janet Yellen] sounds more hawkish or the dot plot comes in more hawkish than the market is expecting,” he said.
Stocks were lower in the past week, with the S&P 500 off 0.4 percent for the week at 2,372. The Dow was down a half percent at 20,902. U.S. oil prices fell sharply, dropping under $50 per barrel for the first time since Dec. 7.
West Texas Intermediate futures for April were off about 9 percent for the week, after a big jump in U.S. weekly supply. Officials from OPEC nations and Russia, at the CERAWeek by IHS Markit energy conference in Houston this past week, said it was premature to say whether they would extend their production deal in May.
