As had been generally expected, the members of the FOMC did not raise key rates at their monetary policy meeting yesterday. In the run up to the FOMC meeting, the only exciting question was what the statement would be following the meeting of the FOMC. The tenor of the press statement may be summarised as leaving the door wide open for a key rate hike in March. Overall, compared to the previous version the statement sounded slightly more optimistic about the economic outlook. The members of the FOMC also seem to be more confident that inflation will climb towards the Fed’s 2 per cent target in the medium term: according to the minutes of the meeting they believe the inflation rate will rise during the next twelve months and stabilize at around 2 per cent. So the Fed’s communiqué, which was unanimous, must be interpreted as hawkish.
Increased probability of a rate move in March
Yields on 10-year US treasuries initially reacted by continuing the uptrend they had embarked on at the beginning of the year. The likelihood of an interest rate increase in March, which can be inferred from the Fed funds futures, has increased since the latest press statement. At the moment, the probability of a rate hike is 95% after 85% before the interest rate decision.
Rate move in March more likely – but still not certain
We continue to assume that the Fed will continue its gradual rate-hiking path this year. Whether it already raises key rates in March or does not do so until June will probably depend on the development of inflation and the situation in the US labour market. If price pressure initially remains weak and if fewer new jobs are created because of the winter weather, we could imagine the first rate move under the new Fed Chairman Powell will only come in June. In the next few weeks statements from Jerome Powell are likely to be especially intensively analysed for more information as to whether he will really raise key rates at his first monetary-policy appearance in March. At Powell’s first press conference market players are likely to want to get more clarity about whether he chooses a more cautious path with two or three interest-rate increases or whether he is even in favour of four increases this year.