Fed Watch: A 'mandated' hike?


A chorus of Federal Reserve policymakers have pushed the market in the direction of near certainty that a tightening is coming at the March 15 Federal Open Market Committee (FOMC) meeting. Most notably, last week’s comments from New York Fed President William Dudley and Chair Janet Yellen seemed to confirm the Fed is ready to take the next step of normalization. This should not surprise anyone, as measures of the Fed’s dual mandate are at or approaching its targeted levels. First, the unemployment rate is now at 4.7%, near the Fed’s perceived level of full employment. Second, its favored inflation indicator—the personal consumption expenditures price deflator—is approaching its 2% target on a year-over-year basis. In addition, several other U.S. economic indicators have been somewhat strong, enhancing confidence that policy can continue along its gradual path.

The Fed typically prefers to make a policy move after laying the groundwork of building expectations. With that groundwork firmly in place now, economic data would have to sharply disappoint between now and March 15 to prevent the Fed from following through with a 25-basis-point tightening. Today’s labor report did anything but that, with an addition of 235,000 nonfarm jobs. This FOMC meeting also will give the market an update on the Fed’s economic projections (including the so called “dot plot”) and a Yellen press conference. With a hike near certain, the fed funds rate path in the dot plot and Yellen’s answers at the press conference hold the greatest market moving potential.