The Dow Jones Industrial Average is now “the most overbought it has been” in something like 20 years.
As markets looked ahead for the Federal Reserve (Fed) to confirm a widely expected 25 basis point hike in interest rates at 2PM ET (19:00GMT) Wednesday, attention was more likely to focus on the updated economic forecasts and particularly the “dot plot” showing policymakers’ expectations for the future path of interest rates, along with the follow-up press conference by Fed chief Janet Yellen, in an attempt to extrapolate how many more increases could be expected in 2017.
Fed fund futures currently put the odds of a hike at this meeting at 100%, according to Investing.com’s Fed Rate Monitor Tool.
Additionally, all 120 economists surveyed in the latest Reuters’ poll agreed that the U.S. central bank would opt to tighten policy, while a Wall Street Journal (WSJ) survey returned similar estimates.
Though there is always a possibility that the markets could be surprised by the lack of a move or a larger 50 basis point move, most experts think the chances are extremely slim based on what the Fed has communicated thus far.
2017 rate hikes
Looking further down the road, markets have priced in the next tightening to occur in June 2017 with odds standing at 61.6%. That is the first policy meeting where the probability passes the 50% threshold.
According to the WSJ poll, economists on average expected the Fed to hike rates three times in 2017, a slightly more aggressive path than the median outcome of two increases that policymakers themselves penciled in with the last dot-plot released in September.
Strategists at Brown Brothers Harriman believe that the Fed will stand pat on expectations for two rate increases in 2017.
“While this is twice as fast as the pace in 2015 and 2016, it fits any definition of prudent and cautious,” they said.
Too early to speculate on possible new fiscal policies
Since the U.S. elections, markets have speculated that incoming President Donald Trump would embark on fiscal policies including infrastructure spending that could serve to not only foster economic growth, but also to usher in inflation, placing additional pressure on the Fed to tighten monetary policy to avoid falling behind the curve.
Several Fed officials have indicated that his election had not changed their outlook because there were too many unknowns with regard to what policies Trump would implement and what their overall impact on the economy would be.
Chicago Fed president Charles Evans said last Monday that it was “still early to have a good idea of what fiscal policies and other events are going to mean.”
“As policies actually are enacted as opposed to just talked about, I think the appropriate thing to do will be to respond to them as they unfold,” Dallas Fed president Robert Kaplanalso said.
New York Fed president William Dudley, known for being the policymaker most aligned with Fed chair Janet Yellen’s way of thinking, also judged last week that “it is premature to reach firm conclusions about what will likely occur.”
However, Dudley did admit that if market expectations for fiscal policy becoming more expansionary were realized, then market participants could be right that the Fed “will likely respond by tightening monetary policy a bit more quickly than previously anticipated.”
In that sense, Yellen is widely expected to take a “wait and see” attitude at the post-decision press conference at 2:30PM ET (19:30GMT), stating that the Fed’s future movements will be data dependent.
Goldman Sachs did point to the fact that their U.S. economists expect a “more sizeable tightening cycle than the market” which could lead to further strength in the dollar as the market re-prices expectations.
“That said, we also think that chair Yellen will continue to emphasize that monetary policy is not on a pre-set course and that the data will dictate the future path of interest rates,” they added.
p.s I ripped this article from investing.com