Fed to hike rates this week but avoid signaling faster pace, say analysts

A man walks past the Federal Reserve Bank in Washington, DC, US.
A man walks past the Federal Reserve Bank in Washington, DC, US.PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Federal Reserve officials are widely expected to announce an interest-rate increase this week amid buoyancy in the stock market and indications the US 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 per cent to 1 per cent, investors will be looking for whether policy makers change their forecasts for the rest of 2017 and beyond.

Fed chair Janet Yellen may offer additional clues during a press conference in Washington 30 minutes after the 2pm (2am on Thursday Singapore time) release of a post-meeting statement and new projections.

The so-called "dot plot," which displays individual rate forecasts of officials on the policy-setting Federal Open Market Committee, will probably continue to show three hikes this year as appropriate, according to the median estimate. It was last updated in December 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 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 Jan 31-Feb 1 meeting, said Neil Dutta, head of US economics at Renaissance Macro Research in New York.

In her press 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.