Chaikin Analytics said in their recent February wrap-up note to clients that the odds for a rate hike on March 15 are now 50%, jumping from just 15% on January 31. But many market participants are willing to double down on this, with consensus moving closer to 80% odds. Here’s why.
First, 50% is as good as 100%. The Fed hasn’t raised interest rates when the probability was below 50% since the Clinton years. The year started off with contrarians willing to bet that the debt ceiling expiry on March 16, and a strong dollar (too strong?) would give them pause. There are also global headwinds in the anti-euro Dutch elections, Brexit Article 50 trigger (that’s getting complicated in London), and whether or not the European and Japanese central banks will remain more hawkish than dovish. If Janet Yellen was looking for a reason to stand down on rates, that was it. Both Yellen and Stanley Fischer speak tomorrow and then the call on rate hikes will probably go to 99%.
Last month, Yellen basically told congress enough was enough. She said there were risks in waiting too long to raise rates. It’s time. The new Trump Administration is skeptical on these low rates, and wants the physical economy to drive stocks, not the Fed buying bonds and derivatives from investors.
Record highs in the stock market, slightly higher inflation rates and evidence of a strengthening economy all lend credence to higher rates coming this month. The Federal Reserve has projected a 3% rate by 2019, but if the economy keeps on this trajectory it is easy to see another 100 basis points added to that.
A number of investment firms believe the direction is all dollar dependent. Higher rates will pull money out of Japan and Europe and into higher yielding U.S. Treasury bonds, making the dollar stronger. Given today’s unemployment numbers, with initial jobless claims falling to 44 year lows, the strong dollar has not had a debilitating impact on the U.S.. Rate hikes are definitely coming. Most likely in 13 days.