The central bank’s federal open market committee, which is due to begin a two-day meeting on Tuesday, has signaled it will key lending rate at least twice more this year after kicking it up a notch last month.
But Wall Street since February has shown a tendency to swoon at the faintest hint the Fed might consider moving at a more aggressive pace.
And data that suggest the Fed might move four times this year under newly-installed Fed chairman Jay Powell has generated wild volatility in share prices.
While the central bank will leave the benchmark lending rate untouched on Wednesday when it announces the outcome of the meeting, investors will be reading anxiously between the lines for signs of how concerned officials appear to be about rising wages and inflation.
After years at with interest rates at zero in the aftermath of the global financial crisis, the US central bank has nudged the rate up six times since the first move in December 2015, moving in increments of 0.25, or 25 basis points.
“There’s just a level of disbelief that the Fed would actually raise rates a hundred basis points in a year, as if a hundred basis points is a lot," economist Joel Naroff told AFP.
“You’ve got this 10 years of low rates and people thinking it’s almost a birth right," he added. “That’s creating a lot of the uncertainty."
Powell’s nomination to lead the Fed was widely seen as a White House signal of continuity with the end of Fed chair Janet Yellen’s era, which saw low interest rates, tame inflation, rallying markets and steady growth.
But since taking office in February, Powell has managed to spook the markets at virtually every turn.
At his debut congressional testimony that month, stocks turned negative, particularly on Powell’s remark that the central bank’s mandate did not include boosting Wall Street returns.
“We don’t manage the stock market, we manage stable prices and maximum employment," he said.
The Dow lost 1.2% that day.
The index also fell 0.2% following Powell’s first post-FOMC press conference in March, when the central bank hiked and raised its long-term interest rate forecast by a tenth to 2.9%.
Two weeks later, Powell delivered his first speech as Fed chair, saying the central bank wanted to avoid raising rates either too quickly or too slowly.
Stocks fell 2.3% in the wake of his comments, seemingly disappointed he had not promised to slow future rate increases in light of a possible trade war with China.
Kathy Bostjancic, head of US macro investor services at Oxford Economics, said mounting inflation could indeed force the Fed to move faster than Wall Street likes, shattering hopes the central bank will act to protect stock prices.
“I do think chair Powell will be careful as all Fed officials are but I don’t believe that there’s this so-called ‘Powell Put,’" she said, referring to the idea the central bank chief would attempt to put a floor under stock prices.
“I don’t think he could easily give deference to the equity market and enable this idea."
Since the FOMC raised rates in March, economic data have pointed to continued steady growth and signs wages are rising at long last, which would be expected to boost inflation.
GDP expanded by a better-than-expected 2.3% in the first quarter and is projected to return to around 3% in the second quarter, and job creation remained strong.
Inflation has turned up the heat. A quarterly measure of the core Personal Consumption Expenditures price index, the Fed’s preferred measure, which strips out volatile food and fuel prices, surged above the Fed’s 2% target to 2.5%, its strongest quarter since 2007.
Naroff said Powell would be careful not to send markets nosediving -- which could spill over into business confidence and hurt the real economy -- even though markets are not his primary concern.
“If the stock markets are totally flat this year and he gets a hundred basis points, he’ll be a happy camper."