Investors have their eyes peeled for the US central bank’s future monetary policy after its March 14-15 meeting.
Officials from the Federal Reserve are widely expected to announce an interest rate hike to range from 0.75% to 1% this week amid optimism in the stock market and signs the US economy continues to grow steadily. Fed fund futures priced in over 90% chance of a rate increase this Wednesday.
Beyond the anticipate rate increase announcement, investors will also be looking for whether policymakers would revise their prospects for the rest of 2017 and ahead. Initially, the Fed has hinted that there may be three rate hikes for this year.
“The 25 basis point hike is fully priced in, so that's not even going to be a factor...it's more what the Fed's path is going to be going forward,” said Societe Generale currency strategist Alvin Tan.
“We're thinking the 2017 dots indicating three hikes in total is unlikely to be changed. But there's a good chance that the rate path for 2018 and 2019 could be raised slightly higher, in terms of the median dot path.”
Fed chair Janet Yellen may offer more hints during a news conference in Washington after the release of a post-meeting statement and new forecasts.
Three hikes for this year
The Federal Open Market Committee's closely-watched “dot plot” marks the midpoint of policymakers' target range for interest rates. The committee has primarily believed there will be three rate hikes in 2017 through the “dot plot”, which is a graph of policymakers’ intentions.
Any upward move in these forecasts could lead to a supplementary rise in US bond yields, which move contrariwise to prices. The benchmark US 10-year bond has already touched its highest level since 2014, with a peak at 2.63%.
The strength of consumer and economic indicators adds further weight to the case for a rise.
As mentioned, economic indicators and data have solidified the case for an increase, with the recent one being the report on the labor market.
Eric Lascelles, chief economist at RBC Global Asset Management, said: “A further Fed rate hike at the FOMC meeting is practically pre-ordained. Markets have fully priced the outcome, Fed speakers have shouted it from the rooftops and the job figures confirm the continuation of American economic vibrancy.”
Inflation has also inched closer towards the Fed’s target rate of 2%. The personal consumption expenditures index, the central bank’s ideal measure of inflation, came in at 1.9% in January, while consumer prices grew by 2.5% in the same month.
Prospect on growth
The FOMC’s statement is likely to continue acknowledging ongoing progress in the outlook for the world’s biggest economy following a series of optimistic economic data.
In the future news conference, Yellen will likely face questions on whether this week’s rate increase marks a pivot toward a faster pace of tightening.
Minutes of the previous FOMC meeting in January 31-February 1 hinted the committee would begin discussing conditions that would permit a change in management of the Fed’s $4.5 trillion balance sheet at succeeding meetings.
At present, the US central bank rolls over maturing securities it possesses and the FOMC has expressed it anticipates to continue doing so until rate hikes are well underway, on the assumption that maintaining the balance sheet’s current size supports the economy by aiding to keep longer-term borrowing costs lower.
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