With the Federal Open Market Committee members about to settle in around the table to begin their two day March meeting, a few points about the likely outcome tomorrow afternoon.
** The FOMC is obviously not going to raise rates on Wednesday, but we believe they will make it clear through a generally optimistic tone on the outlook that a June rate hike will be very much on the table. We doubt April will be a serious prospect for a rate hike, at least not unless the data turns seriously strong in what will only be a single month’s worth of data. Otherwise, we do not get any sense the FOMC is in a rush to resume the upward rate trajectory.
** Again, as we noted previously (SGH 3/2/16, “Fed: A Tactical Pause”), March is more about risk management, watching for any lingering downside from January, but mostly a rate pause against the backdrop of better data that should lift inflation expectations and provide some running room for actual inflation to rise further still, and for the markets to position, as they did in December, for the rate hike we believe the majority of the Committee is penciling in for June.
** With less uncertainty about the near term outlook, we assume the Committee will bring back the balance of risk assessment. And with growth looking pretty good, the labor market still tightening, inflation up, inflation expectations up, oil up, the dollar down, and credit spreads slightly lower, it would be pretty hard not to describe the risks as at least “nearly balanced” if not balanced.
** The risk assessment is likely, in fact, to be the main vehicle through which Chair Janet Yellen forges her Committee consensus. The more dovish, with their wary eye on global weakness, will get their rate pause, but the more hawkish will press to harden up the risk assessment. They may not get what they want, but to dampen a dissent, Yellen can do offsetting repair in the press conference with the upbeat take on the outlook and by making it clear the next rate move is up not down.
** And about those dots: to the extent they are a rough guide to the Fed’s collective assumptions rather than anything like guidance, it seems likely the plot of the 2016 rate dots will dip enough to pull the median down to three hikes this year. But our sense is while some of 2017 dots will be likewise marked lower, quite a few will still be marked at four or more rate hikes to keep the inflation rate at 2% in the latter years of the projections. The dots may thus look more elongated, with two distinct dovish and hawkish clusters.