For 16 months, the U.S. Federal Reserve has been long on inflation anxiety and short on interest rate surprises.
On Tuesday, the central bank’s Federal Open Market Committee (FOMC), which sets monetary policy, will begin deliberations that will likely continue this trend the following day with a 25 basis point rate hike and lots of teeth-gnashing about the continued threat of inflation.
The CME Rate Watch tool is currently forecasting a 98% probability of another quarter point increase that would raise the federal funds rate to a range of 525 to 550 basis points – its highest level in roughly 17 years. The FOMC suspended its 15-month diet of monetary tightening last month, briefly raising investor hopes that it had turned dovish for the foreseeable future. But in a statement following its decision, the bank suggested that inflation remained concerning and that further rate hiking was possible.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” FOMC said. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations as well as financial and international developments.