Federal Reserve (the Fed) officials are widely expected to announce an interest-rate increase this week amid buoyancy in the stock market and indications the United States economy continues to grow steadily, without signaling they anticipate accelerating their pace of policy tightening.
Beyond the expected announcement on Wednesday of a quarter-point hike in the US central bank’s benchmark rate target, to a range of 0.75 percent to 1 percent, investors will be looking for whether policy-makers change their forecasts for the rest of 2017 and beyond.
Fed Chairman Janet Yellen may offer additional clues during a press conference in Washington 30 minutes after the 2 p.m. release of a post-meeting statement and new projections. Here’s what to watch for:
The so-called dot plot, which displays individual rate forecasts of officials on the policy-setting Federal Open Market Committee (FOMC), will probably continue to show three hikes this year as appropriate, according to the median estimate. It was last updated in December 2016 and will cover projections out to 2019, plus an estimate for the longer run.
That would imply that a flurry of signals from policy-makers in recent weeks about the likelihood of tightening in March was more about a shift in the timing than in the number of increases the FOMC is likely to approve this year, according to Jonathan Wright, an economics professor at Johns Hopkins University.
“The data have been generally good over the last couple of months, but not in a way that materially changes the outlook on growth or inflation,” said Wright, a former Fed economist.
The FOMC’s statement will probably continue to acknowledge ongoing improvements in the outlook for the US economy following a string of better-than-expected economic data, including the Labor Department’s latest report on the job market. That update, published on March 10, showed 235,000 workers were added to payrolls in February, and the unemployment rate declined to 4.7 percent.
The report also showed large increases in headcount in the construction and manufacturing sectors, which parallel recent improvements in measures of business investment. The FOMC will probably acknowledge these trends by modifying a reference to “soft” business investment in the statement it published after its January 31 to February 1 meeting, said Neil Dutta, head of US economics at Renaissance Macro Research in New York.
In her news conference, Yellen will probably face questions on whether this week’s rate increase marks a pivot toward a faster pace of tightening.
“Yellen’s job at the press conference will be to emphasize the ‘gradual’ part” of their rate projections, said Roberto Perli, a partner at Cornerstone Macro in Washington and former Fed economist. As for explaining tightening now rather than waiting until later in the year, “it is better from their perspective to take the opportunity when they have it, when they are confident about the prospects for the economy,” he said.
Minutes of the FOMC’s January 31 to February 1 meeting indicated the committee would begin discussing conditions that would warrant a change in management of the Fed’s $4.5-trillion balance sheet at subsequent meetings. Currently, the Fed rolls over maturing securities it owns and the FOMC has said it expects to continue doing so until rate increases are well underway, on the premise that maintaining the balance sheet’s current size supports the economy by helping to keep longer-term borrowing costs lower.