Nobody wants to be the bad guy.
But that's basically Federal Reserve Chairman Jerome Powell's job.
Ever since the financial crisis of 2008, investors have had it easy.
Former Federal Reserve Chairman Ben Bernanke flooded U.S. financial markets with some $4 trillion in fresh money to revive the economy. His successor, Janet Yellen, curtailed the flow, while still leaving interest rates at historically low levels. And after President Donald Trump's surprise election victory in 2016, investors rejoiced over his promises of big tax cuts to provide further economic stimulus; late last year, Trump delivered.
Now, with unemployment at a 17-year low of 4.1%, economic growth accelerating and companies starting to reap a big tax windfall this year that could lead to eventual increases in corporate investment spending and, possibly, additional hiring, Powell is poised to douse some of the fire after taking over from Yellen last month.
Traders fully expect the Fed's monetary-policy committee to raise benchmark borrowing costs by a quarter percentage point at a meeting that starts Tuesday and culminates Wednesday with Powell's first press conference as chairman. The move, following five quarter-point hikes since late 2015, would push rates up to a range between 1.5% and 1.75%.
The key question now is if the Powell-led Fed will need to accelerate the pace of rate increases -- say four rate hikes this year instead of the three currently projected -- to keep the economy from overheating and inflation from overshooting the central bank's 2% target.
"The general view is that the Fed doesn't have to pick up the pace of interest-rate increases," Charlie Ripley, senior investment strategist at the money manager Allianz Investment Management, said in a phone interview. "As we go through the year, if inflation continues to materialize and move toward that 2% target, that's really when that risk of a fourth rate hike comes into play."
Powell told U.S. lawmakers in a hearing last month that he believes "gradual" rate increases are warranted. And in early March, Fed Governor Lael Brainard echoed the sentiment in a speech, asserting that the economy now faced "tailwinds" instead of headwinds, and that "rate normalization is under way."
Signs are appearing that the benefits of a faster economy are starting to flow through to workers. Average hourly earnings in the U.S. climbed by 2.6% in the year through February, down from January's 2.89% pace but still above the 2.47% recorded for November. Those figures are still well below the 3.5%-plus readings notched in 2007, just before the crisis hit, indicating room for further gains.
Powell has said he wants to keep the U.S. economy from overheating, encapsulating the concern for traders: that the Fed's rate increases might halt the upward trajectory of U.S. stocks that have surged more than 70% over the past five years, as measured by the Standard & Poor's 500 Index.
It's the topsy-turvy logic of the Fed. As the economy improves, easy money gets harder to come by; tailwinds turn to headwinds; good guys turn bad.