Chairman Jerome Powell’s debut Fed meeting starts today and all eyes are on him. At the end of the two-day FOMC meeting tomorrow, another rate hike is anticipated. Per the CME Group FedWatch tool, the odds of a hike this time are as high as 93%.
While the market is almost certain of a rise in rates to 1.50-1.75% this time, Powell’s statement is of more interest for further information on the number of rate hikes this year. Notably, the Fed had hinted at three hikes for 2018 while announcing the rate hike in December 2017. So, it will be interesting to see whether the central bank sticks to its prior outlook or hints at raising the number.
Why the Fed Might Increase the Number of Rate Hikes?
You might be wondering what has changed between December 2017 and now, that paved way for the scope of rise in the number of rate hikes this year.
The two key mandates for rising rates — full employment level and inflation of 2% — have been fulfilled (well, almost). The current unemployment rate of 4.1% is close to the full employment level. Also, inflation data (moving toward the Fed’s target) supports a further rise in rates.
Apart from these, a slew of favorable economic data, including continued strengthening of the labor market, increase in household spending, rise in economic activities and better-than-expected GDP numbers, supports a more hawkish stance.
In fact, the Fed minutes of the January FOMC meeting point toward the same. The report highlighted that improving economic growth, stimulus from the tax cuts and rise in inflation support a more aggressive stance by the Fed in hiking rates.
Banks Thrive in Rising Rate Environment
The banking industry benefits the most from the rising rates. Banks derive benefits from a steep yield curve (widespread between short and long-term rates). A rise in short-term rates (to which deposits are tied) helps banks charge more on loans (to which long-term rates are tied) if the long-term rates are higher than the short-term ones. Hence, banks benefit from rising interest rates only if the increase in long-term rates is higher than the short-term ones.