The Federal Reserve is on track to lift interest rates at today’s policy announcement scheduled for 2:00 pm Eastern, according to Econoday.com’s consensus forecast. The projected hike coincides with rising inflation expectations in recent weeks, based on the yield spread for nominal less inflation-indexed Treasuries.
Fed funds futures are in agreement with the crowd that the central bank will squeeze policy again today. Futures are currently pricing in a 95% probability for a 25-basis-point increase in the target rate to 2.0%-to-2.25%, based on CME data this morning. If the prediction is accurate, the hike will mark the third time this year that the Fed has lifted rates, pushing the target Fed funds rate to the highest level in over a decade.
The broad economic picture supports the case for a rate hike, advised a research note published last week by Goldman Sachs economists Jan Hatzius and David Mericle. “Inflation is at target, the unemployment rate is below target and falling, and yet the funds rate remains 100bp below the Fed’s estimate of its neutral level,” they wrote. “Most FOMC participants now agree that this makes little sense — the Fed has some catching up to do.”
Some analysts say that today’s Fed announcement will mark the end of the so-called accommodative regime for monetary policy. “This could well be the meeting where they nix the accommodative characterization,” says Jonathan Wright, a former Fed economist who’s now an economics professor at Johns Hopkins University. “At some point the language is obsolete and doesn’t have any value. You could remove the language or tweak it, and in the press conference [scheduled for 2:30 Eastern], Chairman Powell could cite uncertainty” about some variable as a rationale.
Meantime, the Treasury market’s inflation expectations have been rebounding lately after a period of weakening in the summer. Notably, the implied inflation forecast based on the yield spread for the 5-year maturity less its inflation-indexed counterpart edged up to 2.05% yesterday (Sep. 25), based on daily data published at Treasury.gov – the highest inflation estimate for the 5-year maturities since mid-July.
