Fed: Almost universal agreement on rate hike - BBH

According to analysts at BBH, the most significant event in the coming week is the first FOMC meeting under Chair Powell.  

Key Quotes

“There is nearly universal agreement that the FOMC will hikes rates at Powell’s first meeting.  This is being taken for granted.  The failure to raise interest rates would be significantly more disruptive than a hike at this juncture.  Indeed, the focus is not so much on the rate hike, but the forward guidance provided by the FOMC statement and the Fed’s forecasts (dot plot).”

“The FOMC statement is thought to be largely crafted by the Fed chair.  We locate Powell well within the recent tradition of the Fed and would be surprised with any significant innovation with the statement.  We suspect the statement will look past the recent string of economic data that has prompted downward revisions to Q1 GDP estimates below 2%, including the Atlanta Fed’s GDPNow tracker.”

“The confidence Powell expressed in his recent testimony before Congress and the claim that what were headwinds have become tailwinds is unlikely to be undermined by some high frequency data, like the disappointing retail sales report and the lack of progress on the core PCE deflator.  Consumer confidence, the March Fed surveys, with the impact of the tax cuts and government spending increase still in the pipeline, suggest that, for whatever reason, the post-crisis pattern of soft Q1 data may repeating itself.”

“The main interest of investors is in the forecasts for the Fed funds target this year.  There had been speculation that the Fed would signal that four rate hikes are likely this year, or three after this one.  Several investment banks have done so, but we do not expect a fourth hike will be indicated in the week ahead.  By hiking rates at his first meeting, Powell would brandish his “hawkish bias.” To also indicate a fourth hike would be overkill.”

“A criticism levied against the Federal Reserve is that is has overpromised and under-delivered.  The market has been skeptical of the pace of Fed tightening.  Last year, Fed officials led the market by the nose through strong word cues of its intent to hike rates in March and again in June.  We noted that it took Powell’s testimony to convince many investors of the three hikes suggested by the December dot plot.”

“Despite the forecast of a few private sector economists, the market is not clamoring for a fourth rate hike.  Supply concerns appear to account for the backing up in US interest rates this year.  Arguably, the flattening of the US yield curve plays on fears that Fed tightening will once again proceed an economic downturn.  The University of Michigan’s Consumer Sentiment survey (preliminary for March) showed a jump in the one-year inflation forecast while the longer-term (5-10 years) was stable.”

“Tactically, there is no need to signal a fourth hike at this juncture.  That hike would not come until later this year.  Hence there is no sense of urgency and policymakers are often loath to make a decision until they must.  The prudent thing to do is to wait for more data to clarify the strength of the economy and the trajectory of prices.    There is little to gain in terms of the Fed’s or Powell’s anti-inflation credentials by indicating a fourth hike now.  There is risk that due to no fault of its own, like August 2015 when market volatility seemed to steady the Fed’s hand and deterred the hike that many expected in September to December, a fourth hike may not be delivered.”

“The operative issue is how much the Chair influences the forecasts of the regional presidents.  The Fed was designed so that the Board of Governors has a majority in the rate decisions, but presently there are only three governors.  We suspect that the median dot may edge higher than in December, as some doves (e.g. Brainard) recognize the likelihood of three hikes.  However, we do not expect it to signal a fourth hike.”