It’s a lock, baked in the cake, say markets. In the absence of a Black Swan event, they’re almost certainly correct.
The question now is how many other hikes will arrive this year? Will there be one, two or three, or perhaps none?
According to the Fed’s latest projections released in December last year, the median FOMC forecast was for three hikes in 2017, something that financial markets — as yet — have yet to fully endorse, perhaps as a consequence of the Fed continually overstating the pace of actual tightening in recent years.
As many have been doing since FOMC members began a coordinated attempt to push pricing for a rate hike in March higher a little over a week ago, Tom Kenny, Brian Martin and Daniel Wilson, economists at ANZ, have been pondering what will happen next.
And, like their colleagues at the National Australia Bank, they think the Fed is right, forecasting that the rates will rise three times this year, beginning next week.
“As well as expecting a hike next week, we anticipate a further two in H2 2017. Previously we had incorporated only two hikes in 2017 in total,” the trio said on Wednesday.
“Our forecasts for 2017 and 2018 are now in line with the Fed’s median projection.”
Despite the hawkish rhetoric from Fed officials over the past week, Kenny, Martin and Wilson say that they aren’t expecting much of a change to the FOMC’s forecasts to those offered in December, noting that a majority of Fed officials have said that their base case forecasts haven’t changed much since then in recent speeches.
Given that includes three hikes from the Fed this year, something the markets are not yet fully pricing, the trio say there’s a risk of a “recalibration” of Fed funds rate expectations.
We think that markets may be under-pricing the pace of tightening from the Fed and the terminal or equilibrium rate,” they say.
“(This) would lead to higher bond yields and arguably weaker equity markets given rich valuations.”
This chart from ANZ shows the FOMC’s current median forecast for the Fed funds rate, along with its forecasts and current market pricing.