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Current Views

Is It Now Inevitable?

This week, a succession of Federal Reserve speakers signaled they believe the US economy can handle a rate hike as early as the next Federal Open Market Committee (FOMC) meeting in March.

On Monday, when asked about the timing of a potential rate hike, Dallas Federal Reserve Bank President Robert Kaplan responded with “in the near future”.

John Williams, President of the San Francisco Fed was even more specific in his comments on Tuesday, stating, “In my view, a rate increase is very much on the table for serious consideration at our March meeting.”

Also on Tuesday, New York Federal Reserve President William Dudley noted, “I think the case for monetary policy tightening has become a lot more compelling.”

Wednesday evening, Federal Reserve Governor Lael Brainard, a known policy dove, echoed these sentiments. “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. Assuming continued progress, it will likely be appropriate soon to remove additional accommodation.”

As recently as today, Federal Reserve Governor Jerome Powell observed that “the case for a rate hike has come together”.

At this point, it seems clear to markets that a rate increase is likely to come in March, with Federal Funds Futures now pricing in an 80% probability of a 25 basis point rate hike. This is a significant swing in sentiment over the last 10 days.

While the US Administration’s fiscal policies are still yet to be determined, in addition to how they may influence global trade and growth, it appears the FOMC may move ahead with an interest rate hike nonetheless. Historically, this is a group that reacts rather than leads. Yet given the unemployment rate is below 5% and inflation readings are near their 2% target, perhaps simply the act of continuing to move rates off their zero-bound floor justifies this leadership. Perhaps Fed officials believe remnants of our long-lived emergency monetary accommodation are finally no longer appropriate – especially given potential fiscal policy from Washington.

The market may now see an interest rate increase in March as inevitable, but as always, the future is uncertain. Additional speeches this week could further influence market sentiment, including from Federal Reserve Chair Janet Yellen and Vice Chair Stanley Fischer, who will each speak Friday. As well, economic data between now and the FOMC meeting mid-March may also shape market expectations.

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