The possibility of a rate hike in the Fed’s March policy meeting increased following comments from a few officials including Dudley, Williams, Kaplan and Harker. If this was not enough, Fed Governor Lael Brainard – who was a strong proponent of easy money policy before – also signaled a sooner-than-expected tightening saying “it will likely be appropriate soon to remove additional accommodation.”
With this, the odds of a March rate hike increased to 69% as per CME while some other market gauges claim that it is as high as 80%. Stabilization in the global economy with the U.S. staging a steady recovery, a solid labor market and a considerable pickup in inflation led to the hawkish tone of the Fed officials (read: Gas Prices Boost U.S. Inflation: Time for TIPS ETFs?).
The Fed raised benchmark interest rates by a modest 25 bps to 0.50–0.75% in December 2016 for the second time after almost a decade, attesting the U.S. economy’s growth momentum and the labor market’s well-being, though both have room for improvement. The Fed then forecast three rate hikes in 2017.
Why Chances Are Strong for a March Hike
The U.S. consumer inflation rate picked up pace for six months in a row to reach the highest level in January since March 2012. Existing home sales scaled a 10-year high and the otherwise struggling retail sector staged a solid comeback in January.
Retail sales in January grew 0.4% sequentially, after an upwardly revised 1% rise in December and came ahead of market expectations of a 0.1% expansion (read: Retail Sales Rebound in January: ETF & Stock Picks).
Added to these upbeat data points, a fear of a bubble is also building up in the stock market thanks to cheap dollar inflows. So, the Fed will definitely act in a way so that a bubble is not formed due to a prolonged easy money era or the economy does not run into a recession following a sudden rise in rates (read: Yellen Gives Hawkish Signals: 5 ETF Plays).
