CONFIDENT IN GROWTH

Fed stays course on rate hike forecast

2 more increases expected in 2017

4/21/2017

Don’t bet on the Federal Reserve blinking again.

U.S. central bankers appear to be on course to raise interest rates twice more this year and remain confident in their forecast for growth of about 2 percent despite a series of weak first-quarter reports.

That’s a shift from past performance, when they backed away from projected rate increases in the face of unexpected headwinds. Now, the bar for delay is higher.

“I still think the median of three rate increases for this year — we’ve already done one — is still a good baseline,” Dallas Fed President Robert Kaplan, who votes on policy this year, told Bloomberg Television’s Michael McKee in an interview Thursday. “If the economy develops a little more slowly then we can do less than that; if the economy is a little stronger we can do more.”

Investors are betting on just one more increase in 2017, according to the prices of futures contracts linked to the benchmark overnight rate. The perceived chances of the Fed doing more than that this year were quickly reduced after President Donald Trump said in an April 12 interview that he favored low rates. Then, an April 14 Labor Department report revealed that a closely watched measure of U.S. inflation unexpectedly fell for the first time in seven years. Increasing geopolitical tensions haven’t helped either.

Investors have grounds for skepticism. Fed officials forecast four hikes in 2015 at the time of their December 2014 meeting but only moved once, and then repeated the same pattern the following year: projecting four moves in 2016 and only delivering one.

This time, policymakers aren’t backing down.

“It is appropriate to continue to be raising the short-term federal funds rate,” Boston Fed President Eric Rosengren said on Wednesday. “The economy is strong enough to sustain that right now, even though I’d say that the recent data has been a little softer than I was expecting.”

Comments like this suggest it will take a protracted pattern of weakness to bump Fed officials off the shift they made this year toward a faster pace of rate hikes. Underlying that view is the sense that leaving rates too low for too long is also risky with unemployment already subdued at 4.5 percent and inflation around the central bank’s 2 percent target. 

On top of that, upside risks to their current forecasts for the economy outweigh downside risks.

The Fed panel that decides on interest rates next meets May 2-3, and futures traders see the chances of a hike then as slim to none. Fed officials have five more 2017 meetings after the May gathering, giving them plenty of time to wait and see if their forecast for a rebound in the economy pans out.