Market now pricing in four interest rate hikes this year

As things stand, Fed officials currently are indicating a total of three hikes this year. However, the Federal Open Market Committee meets in June, during which members will get a chance to update their forecasts.

Hawkish expectations are rising even though inflation pressures have been held at bay. The personal consumption expenditures index excluding food and energy is at 1.9 percent, and the Dallas Fed’s inflation gauge is at 1.8 percent, both narrowly below the Fed’s 2 percent inflation target.

In addition, wage pressures have been low, with average annual earnings rising a less-than-expected 2.6 percent annualized for April.

However, Fed officials, led by Chairman Jerome Powell, have been expressing concern about the effects that loose monetary policy can have on asset valuations. Also, the unemployment rate’s drop to 3.9 percent could weigh on Fed officials who follow the Phillips Curve, an economic model that indicates wage pressures will rise as the jobless level falls.

Recently enacted fiscal stimulus in the form of lower taxes and higher spending levels also could prove inflationary.

“Now, with fiscal policy turning from restrictive to stimulative, the economy growing above trend, and investment rising, the short-term equilibrium interest rate is rising, too,” Cleveland Fed President Loretta Mester said in a speech Monday in Paris. “As the expansion continues, it could be that in order to maintain our policy goals, we may need to move the fed funds rate, for a time, a bit above the level of the funds rate that is expected to prevail over the longer run.”

Mester is considered one of the Fed’s more hawkish members.

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