We now expect the Fed to hike rates this month. The sharp year-to-date improvement in US business surveys signals the possibility of accelerating US growth in early 2017. Business surveys released so far in 2017 have been quite strong, with the January ISM manufacturing and non-manufacturing indices at or near one-year highs and consumer confidence surveys also trending up. Other data releases, including consumer spending, have also been stronger than expected.170301-Fed-rate-adjustment-1.pdf (156 KB)
On top of this, Fed officials have struck a hawkish tone in the past few days and we think that they are preparing markets for a rate hike in March. New York Fed President William Dudley, typically considered a dove, noted on Tuesday that the case for a rate increase has become “a lot more compelling”. John Williams, President of the San Francisco Fed, said on Tuesday that March is “very much on the table for serious consideration”. Following the speeches, markets priced in an 80% probability of a rate hike in March (please see graph). Meanwhile, the FOMC minutes of the January meeting suggested that a rate hike would occur “fairly soon”.
We continue to forecast three rate hikes in 2017, but we have brought forward the next rate hike to March, while keeping the next two rate hikes in June and September. The risks are tilted for a fourth rate hike, but this will depend crucially on the size and timing of the fiscal stimulus. Markets are currently pricing in two rate hikes this year.