With the Federal Reserve likely to raise interest rates at its Wednesday, Wall Street is re-thinking its assumptions about the Fed’s actions on rates for the rest of 2017.
Way back in December when the U.S. central bank raised interest rates for the first time, the Fed signaled that it would raise interest rates three additional times in 2017. For the first couple months or so, Wall Street downplayed the likelihood of three increases in 2017. Two, likely, but three? The Fed wasn’t going to be able to move that aggressively due to continuing doubts about U.S. economic strength and about the course of fiscal policy in the Trump administration.
But now that the Federal Reserve has convinced the markets that it will act to raise interest rates on Wednesday–odds of a 25 basis point interest rate increase on March 15 climbed to 95.2% today according to the CME Fed Watch tool from 88.6% on Friday, Wall Street is rethinking that assumption and even starting to entertain the possibility of four interest rate increases in 2017. Odds of a four increase 2017 have climbed to 25% from just 12% at the end of the January.
Wall Street economists are now saying that they will scour the Fed’s post-meeting statement on Wednesday for clues that the central bank might be thinking about raising rates four times in 2017.
That has also started speculation that the Fed might speed up the day when it starts to reduce its $4.5 trillion portfolio of Treasuries and mortgage-backed securities. The Fed has so far said it’s premature to talk about a policy decision to reduce the Fed’s holdings.
My own opinion is that a four-increase year for 2017 is extremely unlikely unless the Fed sees stronger evidence of inflation–especially wage inflation–than it has seen so far in 2017. But you can bet that if the Fed moves aggressively and raises interest rates at its June 14 meeting, financial markets will move further toward entertaining the possibility of a four-increase year and an earlier than expected drawdown in the Fed’s balance sheet.