What we’ll hear about a Fed rate hike and inflation
Everyone – including the stock market – anticipates a 1/4 point hike in the Fed Funds rate, making it the sixth hike since December 2015. All eyes and ears will be on the FOMC statement issued during the press conference. We will look for clues about policy directive, specifically around insights about the number of rate hikes we can expect in 2018 (will it be four? Or three?). Whether or not we have a fourth rate hike in 2018 is irrelevant. If it doesn’t happen in 2018, it will in 2019!
With current inflation expectations, it appears that inflation is probably anchored around the 2% goal. (Note: new projections for inflation, GDP and the Fed Funds rate will be released in a dot plot following this meeting.) Economic data has been strong, the recent jobs report was solid, and earnings continue to pour in above expectations.
I will watch the economic projections closely. These are the first adjustments for future growth since mid-December, just before the tax cuts were enacted. It’ll be interesting to see if there is a bump up in expectations. If growth estimates rise in 2018 and then subside, that’s a signal the Fed doesn’t consider the tax cuts a permanent pin for long-term growth. Further, if inflation expectations are contained to under 2.5% (the edge of the upper bound), the pace of rate hikes will be in line with the market.
Can we expect any surprises?
Not likely. If shifts in policy are on the horizon, the Fed will give us a heads up, usually through speeches from committee members. Lately, we’ve heard them talk about the importance of keeping inflation contained, the pace of rate hikes and staying flexible to move quickly (if needed).
I predict that this first press conference with Chair Powell will be fascinating. His style appears to be far different from his recent predecessors (Ben Bernanke and Janet Yellen). Powell is fully aware that policy is far more important than one man’s (or woman’s) view, making him a consensus builder.
Of course, this is all speculation. If we need to shift our options trading strategies, we’ll know after the Fed’s press conference.