WASHINGTON • US inflation is perking up. And just like that, commentators are speculating that the Federal Reserve may raise interest rates more times than the three moves pencilled in for this year.
So, when policymakers gather in Washington next month, how likely is it that they will add another hike to their dot plot of quarterly interest-rate projections for this year?
Not very likely. It would take a dramatic shift in the dots, carrying almost all of the centrists on the Federal Open Market Committee (FOMC), to move the median forecast for the group up a notch.
In their December projections for the dot plot, only four officials said four or more hikes will be appropriate for this year. To lift the median, four additional colleagues would have to join them, bearing in mind the group will drop from 16 members to 15 due to the departure of former Fed chairman Janet Yellen on Feb 3. Dr Yellen was likely among the six officials who in December forecast three moves.
The rest of that group, according to Bloomberg's analysis, are likely new Fed chairman Jerome Powell, Fed governor Randal Quarles, San Francisco Federal Reserve Bank president John Williams, New York president William Dudley and Dallas president Robert Kaplan.
It is not impossible but quite a stretch to think four of them would upgrade their projections for their two-day policy meeting next month, on the basis of January's faster-than-projected consumer price data, which was released on Wednesday.
United States consumer inflation jumped sharply, with the consumer price index, which tracks the costs of household goods and services, rising 0.5 per cent last month, exceeding analyst expectations.
"They'll have to rejigger their forecasts a bit, and that should lead eventually to a steeper path of policy," said Barclays chief US economist Michael Gapen in New York.
"Whether that's enough to move the median in March is probably a tall order," he added.
Fed officials are loath to react to anything less than a clear trend change. A couple of bullish reports in wage and inflation data - which are notoriously volatile and subject to revision - do not a trend make.
When they projected three hikes for this year, officials were already incorporating an expectation that inflation would move up smartly this year. Why change your projection if the underlying forecast is simply proving accurate? Also, markets are already expecting rate increases next month and in June. That puts four hikes well within reach by the end of the year. So, if an FOMC member is inclined to raise his projection from three to four, there is really no urgency to do so now.
With investors on-side, it makes more sense to keep options open for either three or four, unless the FOMC wants market participants to begin thinking about the possibility of five moves this year. That does not seem likely at this early stage of the year.