Fed: Set to increase the fed funds rate at its March meeting - NAB

Following clear signals from the Fed over the last week Tony Kelly, Senior Economist at NAB, now expects that the next increase in the fed funds rate will be in this month’s meeting and are also now expecting three rate hikes this year rather than two.

Key Quotes

“We have brought forward our call for the timing of the next federal funds rate hike from June to March. This would take the fed funds target range to 0.75 to 1.00%. The change in our call reflects clear signals from a slew of Fed speakers over the last week or so, capped off by the Chair Janet Yellen on Friday (US time). Referring to the upcoming Fed meeting on 14-15 March, the Chair indicated that if employment and inflation have moved in line with their expectations, “…a further adjustment of the federal funds rate would likely be appropriate.”

“The message from Fed speakers – including dovish ones such as Fed Governor Lael Brainard - over the last week or so is that this bar has been met. As a result market implied pricing from 30% on 28 February to around 80% now.”

“The main risk to a Fed hike in March is Friday’s employment report. However, it would have to be very weak to change Fed views. The Fed is used to seeing a degree of volatility in the data and won’t be put off by a soft report particularly as other indicators of the labour market are running strong; highlighted by the decline in initial jobless claims to a new low.”