At its December 14 meeting, the Federal Reserve signaled that it was thinking about three more interest rate increases in 2017 instead of two. (The Fed raised interest rates by 25 basis points on December 14. That was the Fed’s first interest rate increase in 2016.)
So far at least the financial markets disagree.
Oh, the Fed’s decision and signal did change market sentiment. The financial markets now believe that two interest rate increases are likely in 2017. Before December 14 the betting was on a single increase for the year ahead.
But Wall Street economists still believe that three increases is a move that’s off the table, according to a Financial Times survey of 31 Wall Street economists. Those results are backed up by the Fed Funds futures market. The CME Fed Watch calculations, based on pricing in the futures market, say there’s just a tiny 4% chance of a Fed move at the central bank’s February meeting. Those odds stay heavily weighted against a rate increase at the March (just 25%) and May (just 33%) meetings. It isn’t until the June meeting that the odds for an interest rate increase push above 50%.
One reason that Wall economists think the Fed will move even more slowly than the Fed has signaled is their relative pessimism about the power of any Trump administration stimulus to add much to U.S. economic growth in 2017. Even if President Trump can deliver on the promises made by candidate Trump on an infrastructure program and big tax cuts, Wall Street economists see that adding just 0.2 percentage points to growth in 2017 with the growth rate for that year at 2.2%. In 2018 the Trump administration’s efforts would push growth up 0.4 percentage points to 2.3% for the year.
With economic growth at those modest rates, Wall Street economists figure that the Fed won’t raise rates three times in 2017.
Which puts the financial markets in an “interesting” bind. Either growth will be as low as Wall Street economists estimate–which would undermine some of the more enthusiastic assumptions behind the rally since the November elections–or growth will be higher than the economists now expect–which would suggest that three interest rates increases from the Fed might indeed be on the table.