Will the Wolf Howl – Outlook of Interest Rate hike in March

When 2015 began, most voting members of the Federal Reserve believed two rate hikes would be appropriate. Yet only one was delivered. In 2016, the Fed came back with promise of four rate hikes, again their willingness only amounted once. The script for 2017 now highlights a promise of three rate hikes. Naturally, investors are skeptical.

The current edition of the Federal Reserve has deservedly gained a dovish reputation. Every transcript of FOMC meeting assures market the deliberate and slow pace of any possible rate increases. In the latest minutes of Fed’s Jan 31 meeting, even though they re-iterated the need to raise interest rate fairly soon. It was balanced by the Committee’s opinion that much lower unemployment rate or higher inflation are extremely unlikely. Markets deemed this information dovish. In the immediate aftermath, Treasury and Dollars traded down while Gold was up.

Source: @WartenbergHans, @pdacosta

Since mid-February, the Federal seemed to be on a campaign to convince the market that the first of its promised rate hike will in fact commence in March. Here is the list of hawkish statements compiled by Bloomberg.

 

The brief dip in the future implied probably of a March rate hike has made a swift hair pin turn and is zooming steeply upward.

 

The latest statement made by William Dudley in an interview on Tuesday with CNN seemed to have the market convinced. “It seems to me 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,” he said. Mr. Dudley is one of the closest ally of Chairwoman Janet Yellen and is normally considered a dovish member. His change of tune is particularly significant. Apparently, the probability of a rate hike in March now stands at 80%.

Judging by recent price action in the stock market, it is not really concerned. Yes, the wolf will come in March. But this time it wouldn’t bite. At least, the market is convinced.

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