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Wednesday, March 01, 2017

Duy: On the Fed, Possible March Rate Hike, and Dudley

by Calculated Risk on 3/01/2017 07:29:00 PM

From Tim Duy at Bloomberg: Timing of the Next Fed Rate Hike Is Now a Balancing Act

Will they or won’t they? Bond traders are now pricing in odds above 75 percent that Federal Reserve policy makers will raise interest rates when they meet in two weeks, but there is still plenty of data to chew on before then. ...

The timing of the next hike is a balancing act between the need for preemptive policy to stave off inflationary pressure against the desire to let labor market strength continue to eat away at any residual underemployment. As of December, the median Federal Open Market Committee participant believed that balance was met with three 25 basis-point hikes in 2017.
That number, however, is somewhat deceptive as some of the more hawkish FOMC members, such as Richmond Federal Reserve President Jeffrey Lacker, aren’t voting members this year. The voters have tended to tilt dovish, which is why I describe the forecasts within the Fed’s Summary of Economic Projections as pointing toward two hikes with an option on a third. That speaks to moves in June and December and possibly September.
And from Duy at Fed Watch: More on Dudley
I think in this interview Dudley is doing a good job explaining policy in terms of the forecast. That is something the Fed needs to keep pushing. It doesn’t sound like the forecast or the risks have moved sufficiently to change the number of rate hikes expected this year. But he sure seems to be leaning toward pulling forward those hikes.
Bottom Line: When I read the interview, it is hard for me to see that he has a strong conviction for drawing forward the rate hike to March. It seems odd to do so if he sees no change in the forecast and downplays the impact of the upside risks. If he does want to move in March, it tells me then it has little to do with either factor and is entirely about staying ahead of the curve. It is about the need for a preemptive rate hike. If his forecast is for three hikes and he wants to hike in March, then his patience has ended and he wants those hikes frontloaded. If for FOMC participants as a whole the forecast has yet to change much, then it is possible that the even if they raise in March, the median projection of three rate hikes this year remains steady.
CR Note: Just a reminder - for the last several years, every time it has been a close call whether the Fed will raise rates - the Fed has passed.