FOMC to go ahead with the rate hike - Rabobank

Philip Marey, Senior US Strategist at Rabobank, suggests that today’s main event  is the FOMC decision and after last Friday’s Employment Report, it is likely to have convinced the FOMC to go ahead with the rate hike that they carefully signalled to the markets earlier this month.

Key Quotes

“The Fed’s urge to hike only three months after the December hike, being very hesitant only a month ago at a meeting that revealed a lot of uncertainty regarding the fiscal policy plans of the new administration and its impact on the economy, suggests that the Fed is now making the same bet on fiscal policy as the markets. This suggests that the ‘animal spirits’ that are boosting the markets have reached the Fed as well.”

“New York Fed President Dudley’s interview with CNN on February 28 showed this most clearly. He said that the large increases in household and business confidence, and very buoyant financial markets, had made them even more confident that the economy will continue to follow the trajectory projected by the FOMC. However, despite the upbeat confidence indices, the nowcast for Q1 GDP growth – published by the Atlanta Fed – has fallen to 1.2% as of March 8. This underlines how much the Fed is banking on the upbeat confidence indices and exuberant financial markets, setting itself up for disappointment sooner or later. If we are right in our assessment that the market rally is overdone and that it will be difficult for President Trump to deliver on his promises, then the Fed joining the party could make the bubble even more dangerous, ending in an even larger reversal.” 

“The FOMC meeting concludes with a press conference by Chair Yellen. The Fed will also publish the updated projections. The rate projections will be of particular interest. Back in December 2016, they implied three hikes in 2017. However, with a rate hike in March, we could very well be on course for four rate hikes this year. Therefore, markets will be looking at the ‘dot plot’ for clues about the Fed’s intentions beyond March.”

“We cannot rule out that the Fed’s newfound optimism has brought back the belief – displayed earlier in December 2014 and 2015- that four hikes per year are appropriate. However, we think it is still somewhat more likely that the Fed is simply following through on the three hikes promised in December 2016, as the data have evolved in line with the Fed’s projections, as suggested by Dudley’s quote above. At present, markets have priced in three hikes, so an upward shift in the dot plot could push up US treasury yields.”