The FOMC minutes last week supported our assessment that the odds of a March hike had increased. We have consequently boosted the probability of a March hike from 33% to 40%. If events evolve as we expect, the minutes suggest to us that the FOMC will cross the threshold for action by May; we put the odds at 55%. And if not then, we see a high probability of a move in June—around 80%. Looking ahead, the two most obvious events that would alter our assessment of the likelihood of a hike in March or subsequent meetings are speeches by Fischer and Yellen this Friday, March 3, and the employment report the following Friday. (See our analysis.)
Policymaker Communications
FOMC policymakers continued to diverge on how to appropriately characterize the likelihood of a March hike and the ensuing pace. Kaplan was of the view that the FOMC must be “tactically conscious” of “windows of opportunity” during which the FOMC has the opportunity to hike, noting that the FOMC should keep a March rate hike as an open option. Lockhart acknowledged that “March is live” and “the data are supportive of considering a move.” But he reminded the audience that the “fairly soon” wording in the minutes referred, in his view, to the next three meetings and that serious consideration for March did not “necessarily mean the Committee will make the decision to move.” He added: “Two or three Fed funds moves are likely this year as long as the economy remains on the track it is on.” Powell also noted that three hikes this year is a plausible outcome and saw no signs that “we are behind the curve.” Mester shared this view, and pointed to greater uncertainty in forecasts and expected rate paths as a result of fiscal policy details. Harker saw three rate hikes this year “independent of any fiscal policy changes.”
On balance sheet issues, Lockhart favored “natural runoff gradually [shrinking] the balance sheet” over several years. He saw asset sales as unnecessary unless monetary policy proves ineffective. Powell saw now as an appropriate time to consider when to shrink the balance sheet, though he gave no clues about when the FOMC might actually change the reinvestment policy.