Market Analysis

Fed To Adopt Hawk-Eyed Approach?

Notwithstanding this week’s benign US inflation data and (again) underwhelming US retail sales, another 0.25 per cent rise in US interest rates is still regarded by the markets as a near-certainty on March 21. Fed funds futures pricing point to the odds of a hike being greater than 85 per cent. So the question that traders may wish to ponder over the weekend is why should the Federal Open Market Committee (FOMC) decision matter if the markets have already priced it in? The answer may lie in the accompanying statement. One of the points traders may wish to look out for whether there are signs, for example in the “Dots” chart, that the FOMC members are inclining to a steeper path of rate hikes than previously. That doesn’t necessarily mean the FOMC will indicate it now sees 4 rather than 3 hikes in 2018 but the FOMC could suggest that 4 is now more of a possibility though data-contingent. Indeed even if the FOMC does decide 4 hikes will be needed, the FOMC might wish to prepare the market ahead of time before revealing their hand.

Traders might also wish to bear in mind that rotation of voters on the FOMC has meant that policy “doves” Neel Kashkari (of the Minneapolis Fed) and Charles Evans of the Chicago Fed are not voting this year, so if (or perhaps that should be when) the Fed hikes next week there should be no dissenters. Traders may also recall that when new Fed Chief Jerome Powell spoke on Capitol Hill last month he said his personal outllok for the US economy had “strengthened since December.”  Previously somewhat closer to the policy dovish side of the argument, Fed Governor and FOMC voter Lael Brainard’s more recent comments have been more hawkish. The markets may have already concluded the Fed will hike on March 21. What’s less clear is whether the markets have considered the possibility that the Fed could also adopt a somewhat more hawkish tone.

Written by Neal Kimberley, External Currency Analyst.