Fed officials are expected to raise interest rates Wednesday, but it's not clear they will do much to resolve the debate in markets about how many more hikes are coming this year or next.
The Fed has forecast three hikes for this year, but some economists expect it to add another. The market has priced in three hikes, but the question is whether Federal Reserve officials will signal a fourth when they release their latest forecasts Wednesday afternoon. That could result in a jump in bond yields and a stock market sell-off.
One thing the markets do seem to agree on is that the tone of Fed Chairman Jerome Powell's first meeting will be decidedly hawkish, and the Fed will reinforce that it sees an improved economy and it plans to continue raising interest rates.
Treasury yields rose Tuesday in anticipation of Fed rate hikes, with the 2-year yield reaching 2.35 percent, a more than nine-year high. Stocks traded higher, but there were undercurrents that suggested the market was also setting up for rate hikes, as real estate, telecom and utilities shares slumped and financial stocks rose.
The Fed is expected to notch up the target fed funds rate range by a quarter point to 1.25 to 1.50 percent, and also provide new forecasts for the economy and interest rates. The latter has been the topic of market speculation for weeks.
Diverging views in the markets may result in a volatile reaction, no matter what the Fed does. Many economists agree with BofAML and expect the Fed to stick with its forecast for three rate hikes this year, including the one Wednesday. But others see a chance for four this year and one or two more added next year.
Some market pros said if the Fed does move its longer run rate, the point where the Fed is expected to stop raising rates, that would surprise the market and cause bond yields to rise. As it is, bond yields have been rising this week, with the 2-year Treasury yield touching 2.35 percent, a new nine-year high.
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