FOMC Preview: Investors look to rate hike projections for next year

The U.S. Federal Reserve will be holding its last monetary policy meeting this year on Wednesday.

The Central Bank is expected to hike interest rates one more time, bringing the Fed funds rate to 2.25% – 2.50%. The Central Bank will also be releasing its economic projections, ranging from inflation and unemployment to interest rate projections.

The Central Bank, which was until a few weeks ago seen to be pursuing an aggressive rate hike path is showing signs of easing the pedal. Interest rate hikes next year are expected to be far and fewer in between.

While initially projecting three rate hikes for next year from the September policy projections, the markets have maintained that the Fed will hike rates only twice next year.

Fed members remain divided. However, the Fed Chair, Jerome Powell surprised the markets a few weeks ago when he said that the Fed funds rate was near the neutral level.

His comments came just a month before when he said that the interest rates were far off from the neutral level. The dovish comments came on the back of the U.S. President Trump putting pressure on Powell in various interviews.

At one point, Trump said that he was not happy with his decision of appointing Powell as the Federal Reserve Chairman.

The Fed members are also divided somewhat.

James Bullard, the St. Louis Federal Reserve bank president, has taken a dovish narrative on the U.S. interest rates. Speaking at a banking association in Indiana a week ago, the St. Louis president called for the Fed to halt its interest rate hike plans.

“The current level of the policy rate is about right,” Bullard said noting that inflation expectations had dropped recently. He said that in his view, the current policy was appropriate as interest rates are already slightly restrictive.

Speaking about the neutral interest rate, Bullard said that it was around 2.0%. The Fed’s interest rate is expected to be at 2.25% – 2.50% following the December meeting.

Brainard: The Federal Reserve Governor, Brainard has been a staunch hawk in the FOMC. In her recent comments, she said that the current rate hikes had served the economy well. She maintained that this should be the appropriate approach in the near term as the U.S. economy is currently healthy.

“Gradual path of increases in the federal funds rate has served us well by giving us time to assess the effects of policy as we have proceeded. The approach remains appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves,” Brainard said in her comments.

However, she also raised concerns about inflation noting that it was “muted overall.” Despite the concerns on inflation, Brainard said that with consumer spending staying strong, she expects robust economic growth into next year.

However, the Fed Governor said that the tailwinds currently helping the U.S. economy could begin to fade toward the end of next year.

The U.S. economy has been a firm footing for most of this year. However, growth slowed in the third quarter to 3.5%, compared to above 4% growth seen in the second quarter. Fed officials are likely to take a cautious tone in their forward guidance now.

Meanwhile, the U.S. labor market has maintained strong gains. The recent labor market data showed that the unemployment rate was steady at 3.7% while the labor market was seen absorbing more slack. Wage growth finally rose 3.0% on the year indicating that price pressures could start to build.

However, inflation has remained muted, although staying close to the Fed’s 2.0% inflation target rate. Previously, the markets grew cautious as they expected a surge in inflation to push the Fed into hiking rates at a faster pace.