Wednesday, 22 February 2017
Is the Fed raising rates in March?
Labels:
fundamental review
Now that’s a good question guys. It seems everyone is asking the same question these days, especially after Fed Chair Janet Yellen said last week that the US regulator is likely to begin rate normalization in the near future if the economy continues to perform at the current pace.
"Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession," said Yellen in prepared remarks before the US Congress. Last December, the Federal Open Market Committee hinted that as much as three interest rate hikes could be expected in 2017. Market players were pricing only two hikes (June and December), but after Yellen’s words chances for a March increase rose from 18 to 23 percent.
"At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," added Fed’s Yellen. However, the regulator is not only looking at economic indicators. Yellen also noted that the political sphere plays a big role in defining monetary policy, especially as many people still don’t understand the effects of President Donald Trump’s proposals and reforms. "While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity."
Markets are still waiting for a tax reform that Trump has anticipated two weeks ago and promised to release relatively soon in order to reduce the tax burden for American citizens. Since then, US equities have been moving upwards on speculation that such measure will positively impact on consumer spending and promote higher returns for business. Another key point to analyze an upcoming rate hike is the labor market. Unemployment is indeed one of the most relevant things for the US central bank right now. Recent data has confirmed that the economy is adding a great number of positions, although wages remain low.
So far, there are two scenarios you should keep in mind:
◦ Fed raises interest rates in March or May, opening the doors to a three-rate hike year. In such case, investors would have to adapt to a new way of doing things. Three hikes would be the new standard and even a fourth one shouldn’t be dismissed.
◦ Fed keeps monetary policy steady in March and market players calm down. This alternative shows that the regulator is brave but not too much. There are still factors weighing on the decision, especially Washington’s agenda.
Fort Financial Services
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