CHART OF THE WEEK
On March 15th, investors are almost certain to see the Federal Reserve raise its target range by 25 bps, from 0.50%-0.75% to 0.75%-1.00%. Just two weeks ago, the implied probability of such a move was only one-in-three. In the meantime, with economic indicators remaining healthy overall, several Fed members have been hinting at a March rate rise. Despite some doves maintaining their stance, several of them, including New York Fed President Bill Dudley and Fed Governor Lael Brainard, have adjusted their messages, now judging the economic backdrop favourable for a rate rise in the near-term. During a speech on March 3rd, Fed Chair Janet Yellen echoed this message.
OUR ANALYSIS
This near-certain March rate rise means that, barring any major upsets, there will be at least three rate rises in 2017. Both economic consensus and market implied probabilities are pointing in this direction.
Will the Fed maintain its current pace, which is much slower than during previous rate-rise cycles? President Trump’s fiscal measures remain to be seen; however, rising employment and faster inflation could encourage the Fed to quicken the pace.
Besides interest rates, the question remains over shrinking the Fed’s balance sheet, which should begin once the rate-rise cycle is well underway. To achieve this, the Fed intends to cease reinvesting mature securities, although no specific date has been set. Previous Fed Chair Ben Bernanke announced the start of tapering just before his departure in January 2014 and current Chair Janet Yellen could announce a balance sheet runoff before her term ends in January 2018.
Last but not least: whom will President Trump choose to fill upcoming Fed board vacancies? Two seats are currently empty and Daniel Tarullo has opened up a third vacancy by announcing his resignation for spring 2017. Janet Yellen is also likely to resign as a Fed Board Governor when her mandate as Chair ends. These new nominations are likely to bring significant changes to the Fed.
The opinion expressed above is dated March 6th, 2017 and is liable to change.
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