Expectations for the outcome of the FOMC meeting of 15 March have been guided in the past week by a torrent of speeches by FOMC participants, which signalled increasing consensus for a rate increase at the next meeting, pushing up the probability of a move in March to well over 80% (Bloomberg estimate)……
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The minutes of the January meeting had already sent hawkish signals , indicating that a rate hike was considered appropriate “fairly soon”, i.e. at “one of the next three meetings”, and that the March meeting was “live” for a move. The speeches of the past week have thrown open the door for an impending rate hike, to come even sooner than implied by the “fairly soon” expression reported by the minutes. FOMC participants agree on the fact that the Fed’s mandate goals are at hand and that risks are “broadly balanced”. Indeed, Brainard specified that risks “are as close to balances as they have been in some time” (1 March 2017). As we write, out of 17 FOMC participants, 11 have made statements that may be interpreted as supporting a hike in March. According to Dudley (NY Fed) “the case for monetary policy tightening in March has become a lot more compelling”; Williams (San Francisco Fed) said that a hike in March will receive “serious consideration”; several others have said they would consider an increase appropriate “sooner rather than later”, including some of the more dovish FOMC members. Brainard (Board), a well-established dove, said that “it will likely be appropriate soon to remove accommodation”. Later today (3 March) following the release of this publication, three Board members are due to speak (Yellen, Fischer and Powell), and will probably confirm and round up the message that has emerged over the past few days. Four regional Fed presidents are also due to deliver speeches. Powell has already said that the case for a March increase “has come together”. In the worst case, there could be at most two participants potentially opposed to a rate increase (one is Kashkari, who is very likely to dissent). Opinion dispersion within the FOMC is extraordinarily low compared to recent standards, and in our view indicates that the probability attached by the market to a move in March is appropriate.
What is the reason behind the shifting opinions in the FOMC?
There is widespread consensus within the Committee that rates are on an upward path. The decision to make is “when”, not “if”, to increase the fed funds rate at one of the coming meetings.
There are three major factors at play, two of a domestic nature, and one international:
1) the evolution of data and of the economic outlook;
2) developments for fiscal policy and other policies expected of the new US administration, and
3) the evolution of the global scenario.
The indications provided by the domestic and global scenarios seem favourable, with signals of an acceleration in growth and upside surprises from data. For what concerns fiscal policy and the new US administration’s other policies (trade, deregulation), the judgment is still suspended in the absence of details on the reforms. It is increasingly likely that a potential increase in fiscal stimulus will reap no effects before 2018, and may be mitigated by mixed actions on the front of trade, and by a strengthening of the dollar tied to the potential territorial correction of corporate taxation. However, for the time being these indications are not in conflict with the growth trend.
One important factor supporting the case for an immediate hike is that economic and financial conditions are in place for a move in March. The markets reacted to the flow of communication from the Fed without tantrums, neither on yields nor on the dollar, whereas the stock market continues to break new records on expectations that the new administration’s policies will benefit earnings. In the next few months, setbacks are possible due to data (weak 1Q), potential difficulties encountered by the administration, or to the announcement of protectionist policies. The markets may also be back in play with higher volatility (exchange rate fluctuations if the probability of border adjustment increases with the tax reform). In the months ahead, conditions could become less favourable for an interest rate hike, considered appropriate in any case by the end of June. Data and information on the evolution of the reforms will remain dominant in guiding subsequent hikes. In the meantime, a 25bp rise will probably be stowed away in March.
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