With just over two weeks to the next Fed meeting on the 15th March, it is noticeable how all the Fed speakers continue to stress that March is indeed a live meeting. It is also noticeable how the market continues to be unconvinced and is still just pricing in a 40% chance of a hike. Five days before the meeting we get the next Non-Farm Payrolls release and inflation data will be released just hours before they announce their decision; the market thinks this data is far too close to the Fed meeting and any action could cause untold volatility. Cleveland President Mester was quoted last week as saying ‘We certainly never want to surprise the markets’.
Indeed at both the December 2015 and 2016 meetings the market had pricing at 74% and 100% and with just one of the 23 bond dealers that trade with the Fed calling for higher rates next month it looks like March would surprise. That pushes the decision on to the May 3rd meeting but that meeting is not followed by a news conference and is in between the 1st and 2nd rounds of the French election and so is thought of as also unlikely; of course the market could be wrong. One analyst went back over Fed announcements for the Funds rate back to the end of 1994, 191 meetings, and discovered that the Fed have never, over that period, surprised the market with a hike. They looked at market expectations three weeks before each of the meetings and priced in odds above 50% as a level the Fed would be likely to move.
The Fed have on their dot plot three rises this year and with the market looking at June as the first likely rise, data and Trump prevailing, then the Fed could be forced into a bit of a struggle to fulfil their own forecasts. But hey Brexit, Trump and the strong showing of Le Pen should teach us anything is possible.