Fed: March Open, May in Play

Published on February 14, 2017

Directionally, Federal Reserve Chair Janet Yellen’s testimony this morning before the Senate Banking Committee was very much in line with the more hawkish bent of our report yesterday (see SGH 1/13/17, “Fed: March Positioning”).

She was in fact even more explicit than we imagined in what were clearly intended hawkish signals about “upcoming meetings” of the Federal Open Market Committee.

A few points:

** Chair Yellen not only opened the door to a March meeting rate hike this morning, but as we noted yesterday was distinctly possible, she did for May as well: “Whether in March, or May, or June,” she replied when asked about a June rate move, “I can’t tell you precisely which meeting it would be.”

** Indeed, what makes May so interesting in tactical terms is that it would open the calendar to a rate move at any of the remaining meetings in 2017. In that sense, and only then, would every meeting finally be taken as truly “live” after all these years of Fed officials saying so.

** That said, however, we would caution an earlier than June rate move does not raise the prospects of four rate hikes this year, whose probabilities we would put at near zero. Instead the benefit to a “sooner” rate move is maximum policy flexibility on the timing to a second and a possible if not probable third rate hike this year.

** We still think a Fed rate hike at its March 14-15 meeting is, on balance, still more unlikely than not. But we are nevertheless nudging up our March odds to something like 40% from the “30% or higher” probabilities of our report yesterday. And we would put the prospects of a May move at 50%, and barring a move at either of the earlier meetings, a rate move in June would be a near certainty.

** With the modestly more hawkish signal now in place, we suspect Fed officials may in fact soften the tone of their messaging to avoid excessively “hawking up” the market pricing with a month still to go before the mid-March meeting. There is no clear Committee consensus yet, and Committee members will want to wait for the data to support the policy messaging going forward.

** Our sense is that Fed officials do not necessarily expect tomorrow’s CPI print to bolster the arguments for a near rate move. Attention instead is more focused on the February Non-Farms Payroll breakdown in early March. Expectations are for the pace of job creation to slow, unless the labor participation rate continues an unlikely climb despite the downward demographic trend.

** Any upside surprise on wage growth, however welcomed and needed, could also elevate the odds on a rate move brought forward, in that it may renew the forewarning of Chair Yellen’s “pent-up wage deflation” thesis, that a tighter than thought labor market could quicken the pace of wage growth, outstripping any hopes of productivity gains any time soon.

** Also entering into the evolving policy calculations will be any further clarity on the “size, timing, and composition” of the Trump Administration’s tax and fiscal policy ambitions. That could potentially come in time for the March meeting, though unlikely, but certainly the May meeting. And if as stimulative as President Trump is promising, it would provide a supportive backdrop to a May meeting rate move.

** Or not; there are still a lot of developments still very much in play, underscoring the uncertainty Chair Yellen and other Fed officials are at pains to stress.

** But all else being equal, we would nevertheless note that with the economy now at maximum employment and inflation nearing its mandate-consistent levels, those shifting sentiments within the FOMC we noted on Monday has already put the burden of proof on those Committee members arguing against near rate moves in contrast to the caution that prevailed through most of last year.

Back to list