Many participants had already emphasized that March was on the table, but markets remained skeptical. How would the FOMC build in high enough expectations to allow it to hike in March? The answer was easily and quickly: five talks gradually raising the probability, culminating in Yellen, speaking for both herself and her colleagues, unequivocally saying that it was (all but) a done deal. There is always an escape clause, but the Committee fully expects to hike in March.
Three participants who had been relatively dovish—Jay Powell, Lael Brainard, and Bill Dudley—turned hawkish. Powell said that “the economy has behaved pretty much as we expected” and that “the balance of risks, which has been to the downside in recent years, has really shifted to being even and perhaps lifted to the upside.” He concluded: “So you put all that together, and I think the case for a rate increase in March has come together.” We put him into the yes box. Brainard also indicated she was a convert to an earlier first rate hike: “We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time.” She started to express confidence in inflation moving to 2%. So we moved her to the yes box. Then Dudley said: “So, put it all together, I think the case for monetary policy tightening has become a lot more compelling.” There wasn’t much doubt left at this point. Still, we hadn’t heard from the Chair.
On Friday, Fischer said he agreed with the earlier speeches by other policymakers that more than hinted at a March hike: “If there has been a concerted effort to put March on the table, I’m going to join it.” And Yellen, likely speaking for her colleagues as well as herself, capped it off, saying, “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.” That is as close to saying March is a done deal as a chair can get, of course, always with an escape clause in the case of some extremely adverse development. Yes, employment reports are perhaps the most important of the incoming data during intermeeting periods. But the decision has already been made, in effect. Only an extremely negative outcome would change the decision.
Yellen also 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.