With the US Bureau of Labor Statistics on deck later this week for upcoming nonfarm payrolls, only one obstacle still remains in the Federal Reserve’s way when it comes to adjusting rates at the upcoming FOMC Meeting. In keeping with the Federal Reserve’s dual mandate, the Central Bank targets maximum employment alongside medium-term inflation of 2.00%. While last week’s data pertaining to Personal Consumption Expenditure Price Index (PCE inflation) came in just below the target, the gradual trend higher shows that inflation is meeting expectations of officials.
After meeting one of two mandates, employment is the big looming question that could adjust market sentiment ahead of the next monetary policy decision. Even though policymakers have highlighted the prevailing sense of hawkishness in recent policy speeches, without stable and consistent job creation during the month of February, the Federal Reserve may be left with a shakier case for action. With the blackout period preceding the decision already in play, the institution’s stated data dependency will be the guiding force of the US dollar in the absence of remarks from the Central Bank or Federal Government.
Dollar Pulls Back From Recent Optimism
A speech from Federal Reserve Chairwoman Janet Yellen on Friday all but sealed the fate for the upcoming decision due from the FOMC. During her remarks, she pointed out that “we currently judge that it will be appropriate to gradually increase the Federal Funds rate if the economic data continue to come in about as we expect.” The meeting, scheduled for March 14th and 15th is expected to result in a 25 basis point rate hike, bringing the benchmark from 0.75% to 1.00%. Federal Funds futures as tracked by the CME Group currently indicate an 86.40% probability (as of March 6th, 2017) of this action during the next monetary policy meeting.
This growing likelihood spurred a significant rally in the US dollar throughout the week before the currency corrected late on Friday’s session. However, now that the dust has settled a little, traders are cautious towards the US dollar with the rate hike already largely priced-in. Employment data due later this week may shed a little light on the Federal Reserve’s willingness to raise rates, however, no major policy speeches will come due until after the decision, suggesting that market participants should focus on data. Any major disappointment from payrolls could shift sentiment, causing the US dollar to fall.
