The US Federal Open Markets Committee (FOMC) will hold its second monetary policy of the year over Tuesday and Wednesday, culminating in new chair Jerome Powell's first press conference at 2:30pm (US time) on Wednesday.
Much interest will focus on Mr Powell's tone, which was distinctly hawkish when he spoke to Congress about the outlook for monetary policy recently, says Fidelity International's Ian Samson.
Mr Powell told Congress about the need to avoid an "overheated economy" and notably failed to rule out four rate rises in 2018.
Obama appointee Lael Brainard, an FOMC member who is typically dovish in her outlook, gave a speech to Congress titled "Navigating monetary policy as headwinds shift to tailwinds", said Mr Samson.
"Taken together, the Fed looks set to move up its 'dots' – its interest rate projections – up towards four hikes in 2018 at its March meeting," Mr Samson said.
"The Fed appears to have decided three things in the past month then. They do still know what drives inflation; it’s going to rise; and they need to act. In part, this is down to how large President Trump’s fiscal stimulus is going to be. It’s also a reaction to a couple of stronger inflationary data-points, although these are too volatile to give a true picture for now," Mr Samson said.
JP Morgan Asset Management global markets strategist Kerry Craig said that higher US interest rates could come as a relief to the Reserve Bank of Australia, since it would be likely to keep the Australian dollar down.
"The strength of the Aussie dollar over the last couple of years has been a dull ache in the neck of the RBA given the headwind it creates to ‘rebalancing' the economy," Mr Craig said.
"A more hawkish than expected Fed should also see bond yields rise, a very hawkish Fed may see that psychological 3 per cent yield on US Treasuries being breached in the near term.
"But the magnitude of the rise in yields will not be as great in the Australian bond market given the lower inflation profile, an economy that’s not living up to potential and the hard data is not following the soft," Mr Craig said.
