Talk may be cheap, but the steady stream of hawkish comments from Fed officials in recent days has convinced the crowd that a rate-hike announcement is likely at the central bank’s monetary policy meeting scheduled for Mar. 14-15.
The probability of policy tightening this month has jumped to 78%, based on Fed funds futures via the CME Group’s FedWatch data. for yesterday (Mar. 2). That’s up from a 31% estimate on Tuesday, when The Capital Spectator reviewed the evidence for deciding if the Fed would lift current 0.50-to-0.75% target range to 0.75%-to-1.0%.
Nothing is certain when it comes to anticipating central-bank decisions, but it’s hard to ignore the relentless drumbeat of hawkish remarks from Fed officials this week. Here’s a summary:
● New York Fed President Bill Dudley on Tuesday said “I think the case for monetary policy tightening has become a lot more compelling.” He explained that “most of the data we’ve seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty sturdy, inflation has actually drifted up a little bit as energy prices have increased.”
● Dallas Fed President Robert Kaplan on Tuesday said raising rates “sooner rather than later” is warranted because “we’re now much closer to meeting our employment and inflation objectives.”
● Philadelphia Fed President Patrick Harker said on Tuesday that “I see three hikes as appropriate for 2017, assuming things stay on track.”
● Fed Governor Lael Brainard said on Wednesday: “Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.” She reasoned that “we are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing and risks to the outlook are as close to balanced as they have been in some time.”
● Fed Governor Jerome Powell yesterday advised that “the case for a rate increase in March has come together” and he anticipated that three rounds of policy tightening would be necessary this year.
Fed Chair Janet Yellen is scheduled to speak today at 1pm Eastern and it would be surprising if she breaks with the hawkish bias we’ve heard over the past few days.
Meantime, how has the Treasury market reacted? The policy sensitive 2-year yield is on board with elevated rate-hike expectations. This widely monitored maturity ticked up to a post-recession high of 1.32% on Thursday (Mar. 2), based on daily data via Treasury.gov.
In fact, the entire short end of the Treasury yield curve – 1-month through 2-year maturities – has edged into post-recession highs as of Thursday (red line in chart below).
Given what the Fed heads have been saying this week, it would be difficult for the central bank to backtrack and pull a “never mind” out of the hat at this month’s FOMC meeting. Consider, however, that there’s still a fair amount of data scheduled for release between now and Mar. 15, including the February update on payrolls that’s due next Friday (Mar. 10).
For the moment, however, Fed chatter strongly implies a low risk of downside surprises for the upcoming numbers, although Wednesday’s first-quarter GDP estimate from the Atlanta Fed is less than encouraging. The bank’s revised its outlook down, projecting that Q1 growth will tick down to a sluggish 1.8% increase from 1.9% in Q4.
Is that an early clue that the odds of a rate hike this month have been greatly exaggerated? Maybe, although it’s still early for Q1 and so the GDPNow model’s latest warning could turn out to be noise.
In the wake of this week’s wall of hike-‘em-sooner-than-later guidance, it would take quite a bit of disappointing figures between now Mar. 15 to convince the market that a rate hike was off the table.
“There has been more and more of the FOMC coming out with the acknowledgment that [March] is a live FOMC meeting and that they should raise rates soon,” David Coard, head of fixed income sales and trading at Williams Capital Group, tells Reuters. “All of those things have put the market on notice.”