March Fed Hike Prediction
Speculation over March US interest rate increase intensifies
Although markets had been expecting President Trump’s speech to Congress to be important for sentiment, it was comments from a key Federal Reserve member which had a much greater market impact.
In comments after the US market close, New York Federal Reserve President Dudley stated that the case for an increase in interest rates had become a lot more compelling.
Dudley also commented that the stock market had risen a lot while there had been a big increase in consumer and business confidence with a rise in animal spirits. Fiscal policy would also probably move in a more supportive direction which would support growth.
Dudley’s comments are particularly important given his positon within the Federal Reserve.
As New York President, he has a permanent vote on the FOMC and he is also generally considered close to the position of Fed Chair Yellen.
In the latest set of Fed minutes, the Fed stated that interest rates could be increased fairly soon and there were still ambiguous comments from Dudley as he stated that fairly soon doesn’t mean a week, a month or two months, but means in the relatively near future.
The markets certainly took the comments seriously with an increase in US bond yields and strong gains for the dollar. Futures markets also pushed the chances of a rate increase at the March 15 FOMC meeting to well above 50%. USD/JPY surged to highs above 113.50 from 112.30 while EUR/USD dipped below 1.0550 and GBP/USD traded below 1.2400.
The comments from Dudley were very deliberate and do have important implications, especially with the Fed blackout period ahead of the March 15 decision starting on Saturday.
Under Yellen, the Fed has clearly signalled its intentions and not increased rates unless futures markets are signalling at least a 70% chance of an increase. Dudley clearly wanted to push expectations higher with these comments.
The intention is either to signal a strong probability that there will be a rate hike this month or that the decision is seen as a very close call and the Fed wants to keep its options open heading into the meeting.
Comments from Fed speakers will continue to be monitored closely with Governor Brainard speaking late on Wednesday and Chair Yellen on Friday.