FOMC Preview: Is A Rate Hike On The Horizon?

While several analysts are of the view that a rate hike is unlikely this week, the Fed may hint that if the economy continues to improve, it may increase rates despite overseas weakness.

On the economic front, consumption in the United States picked up on higher payrolls, and consumer confidence doesn't seem to have weakened like other indicators. A lower savings rate and recovery in personal expenditures suggests that consumption momentum has remained resilient.

Related Link: ECB Continues Down Rate Reduction Road

"We do not think the committee is ready to raise rates next week, but expect the statement to say that risks are 'nearly balanced,'" Goldman Sachs economist Jan Hatzius wrote in a note to clients.

"Guidance from the meeting in general should indicate that another rate hike is likely before too long — we expect an increase at the June 14–15 FOMC meeting, but action at the April 26–27 meeting is not inconceivable," Hatzius added.

Morgan Stanley said, "Diverging global central bank policies have presented even more of a headwind, and headache, for US policy-makers hoping to create more space between zero and the target range."

Barclays does "not expect any policy action by the Fed at next week's meeting of the FOMC," and expects "the committee to say that risks to the outlook for both economic activity and the labor market are 'nearly balanced.'"

While this could usher in a rate hike as soon as April, Barclays believes "June is more likely and maintain its call for two rate hikes this year: one in June and another in December." The firm also expects "the dot chart to show three hikes in 2016 and four in 2017, leaving the end-2016 and end-2017 policy rate 25bp lower than in December."

Similarly, JPMorgan expects "no action at next week's FOMC meeting" and thinks "the message will be one of rate hikes still forecasted for later this year, but with no strong signal as to the expected timing of the next move."

"We look for the tone of the post­-meeting FOMC statement to be fairly upbeat regarding growth and the labor market, but to retain a tone of caution about the inflation outlook, particularly as it relates to the state of inflation expectations," JPMorgan economist Michael Feroli said in a client note.

"The interest rate forecast 'dots' for 2016 should come down, but with the economic forecast for this year little changed, on net, we think that even after next week's revision the dots will remain notably higher than market expectations for rate hikes this year."

Bank of America Merrill Lynch said, "We expect the Federal Reserve (Fed) to remain on hold in March, and still look for rate increases at the June and Dec meetings. This is a tactical delay: the median dot should be 3 hikes in 2016 and 4 in 2017, with small revisions to the Fed's outlook. The tone of the press conference will likely be cautious but positive, supporting later hikes."

Citigroup also expects the "dovish FOMC members to dominate the discussion and wave the caution-go-slow (if at all) flag." It believes there will likely be :no more than two rate increases this year, but the FOMC may put in a third one."

Specifically, Citi expects the 2016 median dot to "decline by 25 basis points, with 2017 either matching this decline or remaining about unchanged from December."

UBS, too, expects that the Fed will maintain its "wait and see" attitude once more, similar to what happened in January, "preferring not to characterize the balance of risks to the outlook."

KGI Research also noted that interest rate hike was unlikely in March, but the Fed "may release hawkish statement amid continued recovery in domestic demand and inflation."

However, Scotiabank maintains a "four-hike forecast" for this year, coupled with expectations of a hike next week. "A policy hold would likely be delivered with an explicitly hawkish bias," the analysts stated.