The Federal Reserve has been full of surprises lately, and there's good reason to expect another on Wednesday.
Back in December, 11 of 17 members of the Fed's policy committee were expecting at least three rate hikes in 2017, and 5 members were expecting at least four hikes.
Earlier this month, Fed Chair Janet Yellen, undoubtedly among those December doves penciling in two rate hikes, made clear that she now sees three hikes as appropriate. As Yellen moved to the center, the big question is whether the center itself moved. It wouldn't take much — perhaps only half of the six members who expected exactly three hikes in December to up their expectation by one notch.
With the 10-year Treasury yield just below its highest levels since the spring of 2014, a shift in Fed expectations to four rate hikes this year might be the catalyst for a breakout to the upside. That might be good news for financials like Bank of America (BAC) and Dow Jones industrial average components Goldman Sachs (GS) and JPMorgan Chase (JPM), which can reap higher net interest margins from rising interest rates and a steeper yield curve. But it might be a negative for shares of homebuilders like Toll Brothers (TOL), Lennar (LEN) and D.R. Horton (DHI).
In the past few weeks, BofA, JPMorgan and Goldman have consolidated as Treasury yields have soared. Meanwhile, the homebuilder group has been on fire, with Toll and Lennar among a raft of stocks breaking out of bases amid strong earnings and expectations for what is expected to be a strong spring selling season. But a further jump in market rates may begin to dampen the outlook.
A more proactive Fed also could continue to drag down gold miners like Newmont Mining (NEM) and Barrick Gold (ABX). The price of gold has slumped close to 5% over the past two weeks as the market has priced in a faster pace of rate hikes and the dollar has strengthened.
IBD'S TAKE: The Federal Reserve is getting impatient to raise interest rates even though prospects for a near-term economic stimulus from President Trump are diminishing.
Already, the Fed's hawkish turn has been both sudden and pretty dramatic. After Yellen spent most of 2016 worrying aloud that the Fed was low on ammunition to combat a downturn, the first surprise came in December. While hiking rates a quarter-point as expected, Fed members' own projections indicated a likelihood of three rate hikes in 2017 — one more than projected in September.
Yet markets didn't begin buying into the three rate-hike outlook until a series of hawkish Fed policymaker comments two weeks ago turned expectations for the March meeting upside down. Yellen sealed the rate hike with her March 3 speech saying a rate hike this month would likely be appropriate. She also endorsed the December projection of three rate hikes in 2017 as likely to be appropriate, assuming that the economy doesn't flash unexpected weakness.
While Fed members' individual projections are anonymous, Fed watchers assumed in December that Yellen was among the doves. One fewer Fed member will make projections this month, with the retirement of Atlanta Fed President Dennis Lockhart. He was probably among the doves, though that's not quite as clear.
President Trump still has three Fed governor openings to fill, so it's very possible that the makeup of the committee will get more hawkish as the year progresses. Still, economic data will be the biggest factor. If the outlook doesn't shift to four 2017 rate hikes this month, more employment reports with 200,000-plus jobs added would certainly move the Fed in that direction by June.
Currently, markets see a 56% chance of a second rate hike by the June meeting, with a third move likely but by no means assured as of December.
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