WHAT ABOUT THE DOT PLOTS?
We, along with most market participants, expect the FOMC to continue to show two more rate hikes this year in the “dot plot” portion of the Summary of Economic Projections that will be released alongside the FOMC statement this week. In our view, the collective decision by the FOMC in March 2016 to reduce the number of expected rate hikes this year from four to two has been instrumental in addressing many of the global imbalances that disrupted financial markets in the first six weeks of 2016. Although much of the focus may be on the “dot plots” for 2016, the market’s attention will likely soon turn to the expected path of rates in 2017. Currently, the dot plots show four 25 basis point (0.25%) rate hikes in 2017, on top of the two in 2016, leaving the fed funds rate near 2.0%. This disconnect is likely to become more troublesome for markets as 2016 progresses.
WILL THE FOMC HINT AT A JULY RATE HIKE?
We continue to expect that Fed Chair Yellen and the FOMC will stress that future rate hikes are dependent on the economy, labor market, and inflation tracking toward the FOMC’s forecasts. Looking back, the FOMC used the language, “In determining whether it will be appropriate to raise the target rate at its next meeting…” in its October 2015 statement. In fact the Fed did raise rates at its next meeting in December.
The inclusion of this type of language in this week’s statement would signal to the markets that the Fed is leaning toward raising rates at the July 26–27, 2016 FOMC meeting. However, in our view, any such move would be heavily dependent on the U.S. data released between now and late July, and on global financial market stresses remaining relatively low. We continue to expect that the Fed will raise rates two more times this year, and if the U.S. economy—as measured by growth in real GDP—runs closer to 3% than 2% in the second half of 2016, a third rate hike in 2016 is not out of the question.
John Canally is chief economic strategist for LPL Financial.