Markets are pricing in a roughly 90% chance of a hike this week, the first of three or four anticipated this year. So the focus is on the dot plot – four hikes or three - and the accompanying language from chair Jay Powell. For risk, markets will want the Fed to hold off indicating 4 hikes in 2018 but keep up its confident assessment of the economy. This will in large part depend on how policymakers assess inflationary pressures – if they think inflation is coming they might accelerate the path of rate hikes.

Since the last meeting in December, inflation has picked up but the pace has not really accelerated. The CPI inflation rate was up 2.2% in the 12 months through February, up from 2.1% through January. It points to a steady but unspectacular pickup in inflation. It doesn’t look especially like there is reason for the Fed to hawkish alarm bells. Markets have been off since the 2.9% print on average earnings which hinted at a faster pace of inflation than we have been used to, but the data since does not suggest that we are about to see a major bout of inflation that forces the Fed to tighten more rapidly.

Dots: Currently the median dot plot suggests three hikes this year, and there is a chance that this could rise to four. However, it is perhaps more likely that the dots show greater confidence in three hikes (i.e., the doves come round to consensus), than the centrists join the hawks and go for four. Nevertheless, with the key doves not voting this year (Neel Kashkari and Charles Evans), it would imply that the actual FOMC dots of voting members is higher – hence we see the market chatter focussed on four hikes. A failure to move the dots from three to four hikes could be interpreted initially as fairly dovish, but could still mean we see four hikes this year.

This is as much about expectations as anything else – how will the Fed conform to what the market thinks? Ultimately the lack of any serious uplift in inflation could mean that the Fed is more dovish than the market wants it to be and that could be good for risk.

Another factor is yield curve flattening, which has reared its head again. A signal to hike faster could be interpreted as a mistake that risks yield curve inversion. Policymakers will be mindful of moving too swiftly.

Trade and tariffs will also be a big focus having weighed not insignificantly in the last week. It may be the wrong moment for the Fed to signal more hawkish policy when we look at the potential negative impact of tariffs on GDP. We wait to see whether policymakers comment on the impact of tariffs or a trade war on the economy.

Finally, a word on stagflation. Retail sales fell for the third consecutive month in February while inflation is firmer. All this before the potential impact of a trade war – which most assume would result in slower growth and higher inflation. Therefore while not the base case at present, the threat of stagflation must be considered. Consumer spending needs to be firmer for the Fed to turn more hawkish.

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