Fed is feeling that it is getting too far behind the curve
The Fed is going to raise rates again at the upcoming meeting. And the move has been well telegraphed. Within only a few days, the Federal Reserve completely turned market expectations around and prepared investors for a March rate hike (the odds for a March hike implied by fed funds futures are currently 100%). It all began with Vice Chair Dudley highlighting that the case for tightening had become “a lot more compelling” in recent months. One day later, usually dovish Governor Brainard added, “It will likely be appropriate soon to remove additional accommodation”, and Chair Yellen hammered the message home by stating that “at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.” If that was not enough, Vice Chair Fischer told the New York Times, “If there has been a conscious effort to signal a March rate hike, I’m about to join it.”
To be sure, we still don’t know exactly what has caused this sudden change in the Fed’s rhetoric. If anything, the hard data in the previous month indicated that first-quarter GDP growth may be a bit weaker than originally thought, while wage gains softened. Against this backdrop, this sudden eagerness to pull forward the next rate hike suggests that the Fed is starting to feel that it is getting too far behind the curve. In line with that, Chair Yellen began to soften the language with regard to the “gradual” removal of policy accommodation. Not only did she qualify the statement by saying that the gradual removal is “likely” to be appropriate, but went on emphasizing that “unless unanticipated developments adversely affect the economic outlook, the process of scaling back accommodation likely will not be as slow as it was during the past couple of years.”
The updated Summary of Economic Projections is unlikely to show any major changes compared to December. With no new details on a potential stimulus, Committee members will likely continue to project around 2% GDP for the coming years, while the jobless rate will go down to 4.5%, and inflation hits 2% over the medium term.
Amid the aforementioned eagerness to somewhat accelerate policy normalization we expect a further upward shift in the dots – albeit without necessarily moving the median dots, which currently indicate three hikes for each of 2017, 2018 and 2019. But, in particular, the Committee members, who had the most dovish outlook thus far, may have ramped up their interest rate projections towards the median.
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The Fed is going to raise rates again at the upcoming meeting. And the move has been well telegraphed. Within only a few days, the Federal Reserve completely turned market expectations around and prepared investors for a March rate hike (the odds for a March hike implied by fed funds futures are currently 100%). It all began with Vice Chair Dudley highlighting that the case for tightening had become “a lot more compelling” in recent months. One day later, usually dovish Governor Brainard added, “It will likely be appropriate soon to remove additional accommodation”, and Chair Yellen hammered the message home by stating that “at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.” If that was not enough, Vice Chair Fischer told the New York Times, “If there has been a conscious effort to signal a March rate hike, I’m about to join it.”
To be sure, we still don’t know exactly what has caused this sudden change in the Fed’s rhetoric. If anything, the hard data in the previous month indicated that first-quarter GDP growth may be a bit weaker than originally thought, while wage gains softened. Against this backdrop, this sudden eagerness to pull forward the next rate hike suggests that the Fed is starting to feel that it is getting too far behind the curve. In line with that, Chair Yellen began to soften the language with regard to the “gradual” removal of policy accommodation. Not only did she qualify the statement by saying that the gradual removal is “likely” to be appropriate, but went on emphasizing that “unless unanticipated developments adversely affect the economic outlook, the process of scaling back accommodation likely will not be as slow as it was during the past couple of years.”
The updated Summary of Economic Projections is unlikely to show any major changes compared to December. With no new details on a potential stimulus, Committee members will likely continue to project around 2% GDP for the coming years, while the jobless rate will go down to 4.5%, and inflation hits 2% over the medium term.
Amid the aforementioned eagerness to somewhat accelerate policy normalization we expect a further upward shift in the dots – albeit without necessarily moving the median dots, which currently indicate three hikes for each of 2017, 2018 and 2019. But, in particular, the Committee members, who had the most dovish outlook thus far, may have ramped up their interest rate projections towards the median.
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