Within the space of a week, expectations for a rate hike from the US Federal Reserve on March 15 have moved from unlikely to a strong possibility, fueled by hawkish remarks from several leading FOMC officials and ongoing strength in US economic data.
At over 80%, many now deem a rate hike next week as close to a lock as one can get, all but confirmed by a speech from Federal Reserve chair Janet Yellen on Friday where she said that “the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016” this year.
Given the Fed only delivered one hike in both 2015 and 2016, that means at least two hikes are likely in 2017, perhaps more, and sooner than what many had been thinking only a week ago.
The National Australia Bank (NAB) is the latest group to tweak its forecasts for the Fed funds rate in 2017, suggesting that the FOMC will hike rates three times this year, starting in mid-March.
“Following clear signals from the Fed over the last week we now expect the next increase in the fed funds rate will be in this month’s meeting. We are also now expecting three rate hikes this year rather than two,” it said in a note release on Monday.
“We had been allowing for two rate hikes over 2017, but with the Fed more confident about the outlook and jettisoning some of the caution of recent years, we now expect three rate hikes.
“This brings us in line with the median Fed member projection from the December meeting, but above what is priced into the fed futures curve.”
The NAB says that the Fed will follow up March’s increase with further tightening in September and December this year.
This chart from the NAB shows where it expects the US Fed funds rate to move in the future, comparing it to both the latest projections offered by the FOMC along with current market pricing.
If the NAB is right, that would be a big shift away from the pattern of recent years where it was the markets, rather than the Fed, who had the better track of predicting where interest rates would sit at the end of each calendar year.
“Key risks around this rate track are the extent to which fiscal policy is loosened as the president seeks to implement his tax and infrastructure policies, as well as how the US dollar and other measures of financial conditions such as credit spreads responds to it,” the bank says.
“Major fiscal stimulus would stoke Fed fears of getting behind the curve and likely lead to a faster pace of tightening, while a large appreciation of the dollar could slow it down.”
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