The Federal Reserve will raise rates this week and signal they expect to follow through with another move later this year, economists said.
Low inflation readings and soft growth in the first quarter will not change the central bank’s mind that rate hikes are prudent with the unemployment rate so low, economists said.
“I think they are going to raise rates and stay on the current course,” said Ryan Sweet, an economist at Moody’s Analytics.
Fed officials have said they are not worried about the strength of the economy. They view weak first quarter growth as transitory and believe inflation will resume rising toward the central bank’s 2% target.
Economists are nearly unanimous that the central bank will raise rates at the end of the two-day meeting on Wednesday. This would be the third Fed interest rate hike in seven months. The central bank will also release updated economic forecasts and Fed chair Janet Yellen will hold a press conference.
The market is also fairly certain of a rate hike this week. Traders who bet on the future path of the fed funds rate currently see a 95% chance of a June rate hike, according to the CME Group.
One interesting twist is that the May consumer price and retail sales reports will be also be released on Wednesday morning during the Fed’s two-day deliberations.
The data is unlikely to change the outcome for a rate hike in June, but softer than expected data could put a September rate hike at risk and potentially change the tone of the Fed’s policy statement, Seth Carpenter, economist at UBS.
Economists are more divided about what the central bank will say this week about its plans to shrink its balance sheet.
The big question is whether the central bank will start the roll-off in September or December, assuming the economy stays on course.
Analysts are looking to see if the Fed alters the language in its policy statement that it plan to hold its balance sheet steady “until normalization of the level of the federal funds rate is well under way.”
If the Fed changed the language to say it expected to shrink the balance sheet to say that normalization was “well underway,” that would be a “clear marker” that the balance sheet run-off will start in September, Carpenter of UBS said.
Most economists don’t expect this language change. Instead, they see Yellen providing some color about the Fed’s plans in the press conference and this would signal a December start for the run-off.
Fed officials have penciled in three rate hikes this year, so economists say the central bank will still intend to raise rates in September. But the market has its doubts, with traders putting only a 23% chance of a move at that meeting.
But the Fed won’t signal any chance in the path of policy this week.
“We do not expect capitulation on the rate path at this meeting,” said Krishna Guha, vice chairman of Evercore ISI.
Economists believe the Fed will pencil in one more rate hike this year and three rate hikes in 2018, bringing the federal funds rate up to 2.1% at the end of 2018.
UBS said there is a 40% chance that there will be two rate hikes penciled in for 2019 instead of three moves seen in March.
Sweet of Moody’s said the Fed won’t worry about the low expectations yet. The central bank showed in the run-up to its March meeting that they “can jawbone quickly” and raise expectations for a tightening, he said.