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Fed Rate Hikes Are Likely

It is now very likely that the US Federal Reserve will raise interest rates when they meet in March. Ahead of that meeting, several Federal Reserve policy-makers have been making statements signaling the move.

William Dudley, who heads the New York Federal Reserve, pointed to data “…consistent with the economy continuing to grow at an above-trend pace…” in a February 28th interview with CNN. Because Dudley is widely viewed as a rate hike skeptic, his positive statements are being interpreted on Wall Street as a particularly strong sign that a rate hike is coming at the next meeting.

On the same day, the Financial Times reported that market odds of a March rise were as high as 80%. The article points out that the odds had shot up from as low as 36% the previous Tuesday. That same week, Robert Kaplan, president of the Federal Reserve Bank of Dallas said “We would be well-served taking the next step in the not-too-distant future…”

John Williams, the president of the San Francisco Fed, said last Tuesday that a March hike would be “very much on the table for serious consideration.”

While it looks likely to happen anyway, a rate hike in March presents a few problems for investors. The new Trump administration has yet to present detailed budget proposals. That, and the uncertainties regarding tax policy and spending initiatives coming out of Congress, presents some risk down the line. Another release of jobs data will also be coming out just a few days before the March meeting. Anything out of line with expectations may have a big impact.

Nevertheless, if you are listening to what our decision-makers are saying in public, you will likely agree with the head of the Philadelphia Fed, Patrick Harker, who stated last week “I see three hikes as appropriate for 2017, assuming things stay on track”.