At 6pm this evening, the US Federal Reserve is expected to raise interest rates for only the 3rd time in the past decade. Yet to call this raising of interest rates in itself a market moving event might be a misnomer. Instead, many investors are instead likely to focus on forecasts, including the Fed’s famous ‘dot plot’ forecast. Why?

A rate hike today has been widely expected since speakers from the central bank, led by their Chair Janet Yellen, began talking up the possibility of a hike three weeks ago. As a result of the emerging hawkish rhetoric, the probability of a hike at the FOMC’s March meeting jumped. Significantly.

Fed fund futures, a popular gauge of rate hike probability, increased from a 34% reading on 22 February to an 80% reading only one week later. On 7 March, this reading became 100%, effectively ‘pricing in’ a rate hike.

Due to the rate rice being priced in, the US dollar has been on the backfoot at the beginning of this week, despite what is billed as a major market event taking place mid way through. Usually in reaction to a central bank rate hike, investors’ demand for that country’s government bonds rises on the hopes of higher income (with rates increasing, the return on bonds becomes higher). In turn this increases demand for that country’s currency at the expense of others.

However, with the rate hike already priced in, according to Fed fund futures, investors are already likely to have already positioned themselves to receive the benefit of higher returns on bonds, without the risk of wondering whether tonight will see a hike of not.

Instead, they are likely to look at the forecasts put out by the Fed in order to gauge just how hawkish the central bank really is. While in its post-December meeting forecasts for 2017, the Fed stated that policymakers foresaw three rate hikes taking place over the course of 2017, many questioned whether this was a re-run of 2016 where four rate hikes were forecast, however only one eventually materialised.

Now, it looks like we could see the Fed taking an even more hawkish approach. Back in February, banking giant JP Morgan announced that it was expecting up to four rate hikes this year, ahead of what the Fed themselves predicted back in December.

The dramatic increase in hawkish rhetoric in the run up to tonight’s meeting has led some to question whether policymakers themselves might up their forecasts, in effect raising the possibility of an acceleration in the tightening and normalisation of US monetary policy after years of extreme measures globally – quantitative easing, zero and negative interest rates, just to name a few.

Should the dot plot, the 16 Fed members’ predictions for where interest rates will be at the end of 2017 and beyond, show a reading above three hikes this year, it is likely that the dollar would rally as a result of heightened expectations. Equally as important will be whether these forecasts give any indication as to whether 2017’s next hike will take place in either June or September. While Goldman Sachs believes a June hike is possible, many other institutions are hesitant to predict an earlier move from the Fed, perhaps waiting for news of potentially inflationary tax cuts and infrastructure spending from the Trump administration.

Tonight may help to provide some welcome clarity on this highly debated topic. If it does, this could provide investors with the market moving event that is billed, although a rate hike in itself won’t be the cause.

Henry Croft, Research Analyst, 15 March