Global Daily – Chances of March Fed rate hike have risen

by: Bill Diviney

Fed View – In farewell to Yellen: The FOMC kept interest rates unchanged at 1.25-1.5% at its 30-31 January policy meeting – Chair Yellen’s last. The decision was widely expected. The only noteworthy changes were the references to market-based inflation expectations having “increased but remain[ing] low,” while the FOMC now expects inflation to “move up this year” rather than to “remain somewhat below 2 percent in the near term” as in the December statement. Neither changes were particularly remarkable as they simply reflect facts, rather than suggesting anything about the Fed’s reaction function. Inflation expectations have risen in recent weeks, largely on the back of higher oil prices, while the FOMC’s economic projections do indeed foresee a pickup in inflation this year.

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Our view is that although core inflation is likely to bottom in Q1, the pickup will remain modest this year, even as wage growth accelerates (see our note, Why inflation might continue to disappoint, here). With that said, the risk has increased that the Fed will raise rates at its March meeting, one quarter earlier than our current June projection. A March hike is almost fully priced in by futures markets and the Fed would typically want to rein in market expectations if they were contrary to what it had planned, but commentary from FOMC members of late has – if anything -been tilted to the moderately hawkish side. (Bill Diviney)