How Many Fed Interest Rate Increases Will We Get, Anyway?

It’s the edge-of-chair question for credit markets: How many more interest rate increases will the Federal Reserve order? Three? Six?

That issue is heightened now because the Fed’s policymaking body will release its latest minutes on Wednesday. Fed watchers hope the minutes from its July 31-Aug. 1 meeting will give some insight into how many more hikes are coming.

Right now, according to bets on the CME and Fed officials, there will be six quarter-point raises for the benchmark federal funds rate: two more for this year, three more in 2019, and one in 2010. That would lift the benchmark to around 3.5%, well above the current range of 1.75% to 2%.

But a significant group of Fed officials and economists think that would be too much, and perhaps bring on a recession. The most prominent critic: President Donald Trump, who has inveighed against new Fed Chairman Jerome Powell’s continued push to raise rates, which the president fears will hobble the economy’s recently robust growth rate. The Fed has already had two increases this year, after a gradual program of boosts beginning in late 2015.

On Tuesday, Dallas Fed President Robert Kaplan wrote an essay calling for the central bank to hike short-term rates just three or four more times, and then re-assess. At that point, he contended, the Fed likely would reach the “neutral level,” where its actions neither help nor hurt the economy.

Then, Kaplan indicated, he “would be inclined to step back and assess the outlook for the economy and look at a range of other factors—including the levels and shape of the Treasury yield curve—before deciding what further actions, if any, might be appropriate.”

The flattening yield curve, with the two-year Treasury and the 10-year a mere 0.24 percentage point apart, is inciting fears that the curve will invert. Then, short-term bonds would yield more than the 10-year—long a portent of a coming recession.