Along with the highly anticipated monetary policy statement of March 15, when the Federal Reserve announced that they were increasing interest rates for the third time in this tightening cycle, the Federal Open Market Committee also issued an updated “dot plot” and updated economic projections. Both the dot plot and the economic projections were little changed from December when they were judged to be consistent with three fed funds rate hikes in 2017. So the Fed wants us to expect two more rate hikes before the end of this year. However, with the March 15 rate hike, the Fed established the pacing of one 25 basis point rate hike every other meeting, occurring on meetings when there are scheduled press conferences. The Fed is not bound to that pacing, but that is what financial markets now expect them to do. The implied odds of a rate hike happening at the conclusion of the next Federal Open Market Committee meeting on May 3 are very low, at about 6 percent according to today’s fed funds futures market. The odds of the next rate hike, coming with the every-other-meeting pacing, that is on June 14, are reasonably high already at about 58 percent.
Given that financial markets are leaning toward a June rate hike, what then comes next? There are four more FOMC meetings after June: July 25-26, September 19-20, October 31-November 1 and December 12-13. The Fed has two obvious choices with this schedule: either (1) change the pattern of every-other-meeting rate hikes, or (2) have more rate hikes. We assume that the Fed has left the second half of 2017 ambiguous because of the uncertainty associated with Trump Administration fiscal policy. If it looks like the Trump Administration is making good progress toward real economy stimulus through tax reform, budget initiatives, regulatory rollback and/or infrastructure programs, we could expect the Fed to maintain the every-other-meeting pacing of interest rate hikes through the second half of the year, for a total of four rate hikes this year. Conversely, a stalled out Trump Administration means the Fed could reset pacing and only initiate one rate hike in the second half of the year. We expect the Fed to clarify the pacing for the second half of the year before they go into their media black-out period in early June, prior to the June 13-14 FOMC meeting, otherwise financial markets could react adversely to the increasing uncertainty about Fed policy.