Updated: 02-27-2017

Per usual, the minutes from the latest FOMC meeting held a little something for everyone in terms of views on the economy and the potential rate-hike path the Fed might follow.

There was a reiteration that a gradual pace toward normalization will likely be appropriate, yet there was also a subtle indication to market participants that they should consider themselves warned that the Fed could raise the target range for the fed funds rate sooner than expected.

The key passage from the minutes in that regard is the following (emphasis our own):

"In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee's maximum-employment and inflation objectives increased."

This perspective is not inconsistent with the commentary heard of late from other Fed officials, namely Fed Chair Yellen in her semiannual monetary policy report to the Congress, who have indicated the March meeting needs to be viewed as a "live" meeting that could possibly produce a hike in the fed funds rate.

The market is still a long way from being convinced that the March meeting will produce a rate hike.  The CME's FedWatch tool shows only a 17.7% probability of a rate hike in March. There are three key reports in the interim, however, that could change that thinking if they end up being stronger than expected.  That lineup of reports includes the following:

  • The PCE Price Index and Core PCE Price Index for January (March 1)
  • The February Employment Situation Report (March 10); and
  • The Consumer Price Index Report for February (March 15)

The CPI report actually comes out the morning of the next FOMC decision, which underscores the thinking that this next rate hike could very well be a "game-time" decision, particularly if the February employment report shows a notable pickup in average hourly earnings growth on a year-over-year basis.  

If average hourly earnings growth disappoints like it did in January, however, the market will get more strongly rooted in its prevailing belief that the Fed is going to play dead on a rate hike at its "live" meeting in March.

--Patrick J. O'Hare, Briefing.com

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