Market participants correctly anticipate that the Federal Reserve will hike interest rates at the conclusion of this week’s FOMC meeting. The accompanying statement and economic projections will compare hawkishly to previous iterations from past January and December, respectively. But how hawkishly? While the “dots” representing individual interest rate forecasts will rise, they may not yet rise enough to signal a fourth rate hike this year.

We are covering some well-worn ground at this point. Central bankers began sounding a more hawkish note with Federal Reserve Chairman Jerome Powell’s testimony before Congress. Powell’s “headwinds to tailwinds” story was fleshed out further in a speech by Federal Reserve Governor Lael Brainard. A particularly salient point of that speech was Brainard’s analogy of the current situation as the “mirror image” of the situation facing the Fed in 2015-16. During that period, the Fed sharply scaled back the expected pace of rate increases. The implication then is that the Fed may sharply raise the pace of rate hikes this year.

Still, it is not evident that they in fact need to accelerate the pace of rate hikes beyond the expected three. In general, incoming data on growth, unemployment, and inflation appears broadly consistent with the Fed’s expectations for this year. Sufficiently consistent that, considering the economic tailwinds from global growth, fiscal stimulus, and easy financial conditions, those FOMC participants who viewed two rate hikes as likely will up their forecasts to three.

The doves snugging up their policy forecasts will raise the average rate hike expectation, but this by itself would be unlikely to lift the median forecast. To lift the median, central bankers already confident with the inflation forecast will need to respond to freshly announced fiscal stimulus by raising their projections as well. It is not clear to me that enough of the current three dotters raise their forecasts to bump up the median to a full four hikes this year.

I am more confident that the median rate hike expectation for 2019 will rise to a full three hikes, and that we will see the 2020 rate projections rise as well. The additional fiscal stimulus announced since the last FOMC meeting suggest above-trend growth will persist longer than anticipated. The Fed will tend to believe policy needs to be somewhat tighter to compensate.

Other things to look for:

• The longer-run policy rate. My expectation is that increases in the near- and medium-term rate projections will exceed any increase in the longer-run, or neutral, policy rate. That would suggest that central bankers anticipate that they are not chasing the long-end of the yield curve to hold policy neutral. Instead, they anticipate that they are reducing accommodation in an effort to slow the pace of activity. That would imply a flatter yield curve in our future.
• The longer-run unemployment rate. The ongoing persistence of tepid wage growth opens up the possibility the Fed might lower its estimate of the longer-run unemployment rate. That might weigh against any declines in the unemployment forecasts for this year and next that may occur if fiscal stimulus raises the growth forecasts.
• Commentary on the balance of risks. In his testimony, Powell said that the goal of policy was now to avoid overheating. That implies that the balance of risks are weighted toward inflation. Similar holds for Brainard’s comments about tailwinds to activity. Consequently, I think we should be looking for a signal in the statement communicating that the path of policy is more likely to be tighter than anticipated than looser.
• Press conferences at every meeting? There is a possibility that Powell opts for a press conference at each meeting. This would make every meeting truly “live,” compared to now when meetings without press conference are only sort of “live.” It would also open up more of a possibility that the Fed could front load some of this year’s expected hikes.
• Possible extra hawkish surprise in the dots? The Fed tends to be slow moving outside of a crisis. That one reason why we might not see enough dots move up to push the median forecast to four hikes for this year. But we could have a hawkish surprise if some participants up their forecast by 50bp instead of 25bp. That seems unlikely, but not impossible if, for example, increase confidence in the outlook was with 25bp and fiscal stimulus worth another 25bp.

Powell will of course use the press conference to emphasize (or not) any feature of the statement or projections as he deems necessary. Overall, I think he will want to continue to thread the needle between signaling the possibility of an even faster pace of rate hikes while maintaining the language of gradualism.

On another note, we should keep an eye on the recent LIBOR-OIS spread widening. It seems reasonable that no single reason accounts for the widening, but rather a combination of Fed rate hikes, the threat of more rate hikes, balance sheet reduction, dollar repatriation, and fiscal policy. As these issues become more fully priced into markets, we may see the spread narrow. Something to watch for: Perhaps one can argue that we are seeing the impact of tighter monetary policy? It would be interesting if the Fed sees it the same way.

Bottom Line: Increased confidence in the outlook and more fiscal stimulus when the economy may already be at full employment sets the stage for the Fed to boost rates and rate forecasts. But they will be wary of spooking the markets with too much hawkishness. Look for the Fed instead to describe the more hawkish policy stance as still gradual, but with the possibility that something less gradual may be near.