In prepared remarks this afternoon, Yellen said: “At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.” This makes a March hike all but certain, well above a 90% probability. Indeed, only an extreme scenario would stop them from hiking at this point.
Yellen’s tone today suggests that both she and the entire FOMC are solidly in favor of a March hike, a few doves notwithstanding: Voters Kashkari and (perhaps) Evans and non-voter Bullard come to mind, but we expect no more than one dissent and don’t see potential dissents as enough to dissuade Yellen and the FOMC more broadly from resuming rate hikes at this point. After Dudley’s market-moving remarks on Wednesday, we’d suggested that he’d likely consulted with Yellen and that his remarks were part of a concerted messaging effort. Brainard remarked the same day that, “Assuming continued progress, it will likely be appropriate soon to remove additional accommodation,” a significant statement coming from someone who had consistently argued for patience. Yellen’s speech today seems to confirm that this week’s communications were deliberate and coordinated.
As for Fischer, who spoke slightly earlier today, at a separate event, his prepared remarks revealed nothing about March. However, following Yellen’s speech he responded to an audience question in a way that suggested that he, too, would be on board for a March hike: He observed that almost no economic indicator has surprised to the downside in the last three months, and that he “strongly supports” the counsel that has been given by other FOMC policymakers, referring to the many policymakers who have outlined their support for a March hike (link). Fischer added: “If there has been a conscious effort to put March on the table, I’m going to join it.” Most importantly, he also pointed out that Yellen “does not tend to make decisions that ignore the views of the rest of the Committee,” a clear indication that Yellen’s signal of a March hike reflects the thinking of the entire FOMC.
As for the pace after March, she noted that the three hikes implied by the median dots from the December 2016 SEP would be consistent with the “gradual pace” enshrined in FOMC statements. We still see the FOMC raising rates three times this year, but the likelihood of four hikes has edged up, especially with a March hike all but certain. By hiking in March, the FOMC could hike four times without going faster than one hike every other meeting, which might be stretching the “gradual pace” narrative.