Odds of a US interest rate hike in March rise

CME Group FedWatch tool, which calculates unconditional probabilities of Federal Open Market Committee (FOMC) meeting outcomes to generate a binary probability tree, shows the probability of a rate hike in March at 86.4%. At the end of last week, markets saw only a 40% chance.

Yellen's speech a non-event

Federal Reserve Chairwoman Janet Yellen’s remarks on Friday didn’t generate as much volatility as initially expected but she gave a strong hint towards an interest hike in March. “At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate” said Yellen at her speech in Chicago. Nonetheless, 2-year bond yields leaped to %1.345, the highest level in more than seven years.  

Do the recent data support the rate hike expectations?

According to the data published by Labor Department on Thursday, the number of Americans filing for unemployment benefits fell to 223K for the week ended Feb. 24, the lowest number since 1973. Accompanying Wednesday’s Fed’s Beige Book, which reported widening labor shortages and pickup in the pace of wage growth in some areas, this data points to further tightening labor market conditions. Furthermore, Fed’s preferred tool to measure inflation, PCE index, leaped by 0.4% for the month of January, pushing the yearly rate to 1.9% from 1.6% in December. This number matches the highest year-over-year reading since October 2012.

FOMC members

Yellen’s statements came as a confirmation on growing expectations of a March hike, precipitated by several members of the FOMC.  On Wednesday, Fed Reserve Governor Brainard, who has been advocating lower rates for longer, said that it would likely be appropriate soon to remove additional accommodation. Following those comments, on Thursday, Fed Governor Jerome Powell stated that he still supports three rate increases this year. In addition to Brainard and Powell, New York Fed President William Dudley, further aggravated expectations by saying that the case for monetary policy tightening has become a lot more compelling as the data seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace.