Some investors are doubting that the Federal Reserve will proceed with more interest rate hikes in 2019, another sign that the volatility around the central bank's decisions will continue this year.
Fed officials have penciled in two rate increases for 2019, nudging down their earlier projection of three hikes, amid a hazier economic outlook.
But futures markets suggest that investors are betting the Fed will back down from any rate hikes, with some investors even predicting a rate cut this year. The CME Group's FedWatch tool suggests that futures markets see a more than 14% chance that the Fed will cut rates by year-end.
"We'll see how things shake out," said Greg McBride, chief financial analyst at Bankrate.com. "Either the Fed is going to have to rein back their forecasts, or the market's going to realize that the sky is not falling."
The skepticism comes as the Fed gets closer to its wide range of estimates of the "neutral" rate of interest, where the Fed would be neither spurring nor hindering economic growth. Fed Chairman Jerome Powell has highlighted the uncertainty of the policy outlook as the Fed approaches neutral, saying the central bank will monitor and react to incoming data even more closely in the coming months.
"Once you get to that neutral range — and you don't know where neutral is — it makes sense to proceed with more caution [and] take a little bit more time to see how the economy is performing in reaction to rate hikes," said Brett Ryan, senior U.S. economist at Deutsche Bank.
Markets will hear more this year from Powell, who will hold a news conference following each Federal Open Market Committee meeting rather than every other meeting. Analysts have said that decision should give the Fed more flexibility, opening up the range of dates in which markets could expect a significant Fed decision.
But investors might also hear some mixed messages from Fed officials, who could take differing stances on how quickly they should raise rates and when they should do so. Not all of those Fed officials will have voting positions on the Federal Open Market Committee, which has a rotating slate of four regional Fed presidents voting on monetary policy each year. Others have a permanent voting spot on the FOMC.
This year, the new voters will include St. Louis Fed President James Bullard, who has been one of the Fed's most dovish members and has warned against the potential of a yield curve inversion. One of the Fed's more hawkish members, Kansas City Fed President Esther George, will also be joining the panel, as will two Fed officials that analysts view as more moderate: Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren.
Evans had voted against the Fed's third rate increase of 2017, saying inflation had substantially undershot the Fed's 2% target and that keeping rates flat could give officials more time to see whether inflation was strengthening.
Rosengren's most recent dissent came in September 2016, when he and George were part of the minority of FOMC members voting against keeping rates flat. Both of them had favored raising the Fed's benchmark rate at the meeting.