U.S. stock-market investors have grown concerned about interest rates of late, with many accepting that they’re going to rise but still worried that it will happen too quickly. According to one analyst, assuaging these fears will be like walking a tightrope.
“Powell’s biggest challenge will be to make clear that while market conditions warrant steady hikes, the federal-funds-rate target will remain well below its levels of the past 40 years,” said Joe Davis, chief economist at Vanguard, who was referring to Jerome Powell, the newly installed chairman of the Federal Reserve.
Davis called this a “tricky” balance to strike. “The message is nuanced,” he said, “and for the Fed to deliver it will demand an acrobatic sense of balance.”
Powell has been reassuring investors that he plans to only raise rates gradually, following the model set out by his predecessor, Janet Yellen. However, the January jobs report showed wages growing at their fastest pace in year, a report that had some investors worrying about inflation, and even debating whether the market could see as many as four rate hikes this year. The data contributed to the first correction in the Dow DJIA, +0.29% and the S&P 500 SPX, +0.17% in about two years. (The data on wages in the February jobs report calmed these fears somewhat.)
Vanguard’s economist also expects gradual rate hikes. In a blog post, he forecast a total of three rate increases in 2018, followed by three more next year. One of 2018’s hikes is likely to be announced at next week’s Fed meeting, however; Davis said the U.S. central bank was “all but certain to raise interest rates next week.”
This view is hardly a contrary one; the fed-fund futures market is betting there is a 91.6% chance of a 0.25 percentage point rate increase on March 21, according to CME Group data. The prospects of a larger increase are seen as remote, however. Investors see an 11% chance of a 50-basis-point move next week.
Davis wrote that since Powell became chair, the seat has gotten “less comfortable” than it was when Powell’s nomination was approved in January. “The rollout of new tax legislation, the resolution of near-term debt-ceiling dramas, and a rise in aggressive trade proposals have plucked stuffing from the seat cushion,” he wrote. “The developments create new uncertainties about Fed policy and put a premium on crystal-clear communication from the chair.”