March is in Play: What Will It Takes?

A March hike is in play. New forecasts, new dots, press conference, the works. The decision will be data-dependent for sure. But the central question is whether the FOMC will hike if the data remain consistent with the recent pattern–solid employment growth, the unemployment rate near the NAIRU, core inflation around 1.7%, and projected growth near 2%? Or would a hike in March require some surprise in the data that increases the FOMC’s sense of urgency and pushes it to signal a greater prospect of four rather than three hikes this year? We expect the latter to be the higher hurdle, and we do not expect that the data to push the Committee to move in March.  

The case that there is at least some further running room has strengthened since the December meeting.  The unemployment rate is two-tenths higher, the participation rate is up, and recent data for wage inflation have been surprisingly muted. Taken together, these developments would seem to damp any sense of urgency to move. 

Moreover, the only aspect of the fiscal picture that has become any clearer is just how challenging it will be to put a package together. And a high degree of uncertainty still surrounds Trump administration policies on immigration and trade, which both pose potential downside risks to the macroeconomy. The FOMC may view it as prudent to wait a bit longer to see how these developments play out. Further weighing against a  March move are some notable downside risks with respect to the global economy—Greece again, elections in the Netherlands, France, and then Germany, and unresolved Italian banking problems. 

All that said, we do believe that March does remain on the table. Some further sizable upside surprises in employment growth coupled with a noticeable drop in the unemployment rate would stimulate some serious debate. That debate would be further intensified if core PCE inflation were to step up above its current pace of 1.7%. Moreover, there may already be some FOMC members torn between three and four hikes this year. By moving in March, they might feel that they have better preserved the optionality of moving to four hikes if developments warrant.  

In the end, a lack of urgency, the strengthened perception of running room (even if it is small), and some downside risks have led us to stick with our call of no hike in March. We continue to see the probability of a March hike as about one in three. We believe that the case will be stronger by June when we anticipate the first of three hikes for this year.

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