Yellen: Strong signal for March and maybe more - Natixis

Thomas Julien, Analyst at Natixis, notes that the J. Yellen’s confirmed that a rate hike was likely in March if the economy evolves as expected.

Key Quotes

“This means that all eyes will be on the employment report next week (to be released on March 10) but our take is that it will take a catastrophic NFP number to change the Fed’s mind. We are therefore changing our call for the next hike to March (from June). In addition, given the recent Fed’s change of rhetoric we now expect the Fed to hike 4 times this year (March, June, September and December) above market expectations of 3 hikes.”

“Prepared remarks: Chronicle of a Hike Foretold  

• Most of the speech was dedicated to explain why the normalization removal of monetary policy accommodation has been so slow so far and why the environment is now better. 
• The speech was pretty straightforward in signalling that the next hike is likely to occur in March: “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 means that if we don’t see a catastrophic NFP number next week when the February employment report is due (on March 10), then the Fed will move. 
• The last sentence of the speech was also rather hawkish and suggests that the Fed will speed up its tightening cycle this year: “the process of scaling back accommodation likely will not be as slow as it was during the past couple of years.”  

Q&A 

• On fiscal policy: J. Yellen mentioned the great deal of uncertainty surrounding expectations of changes in fiscal policy. She indicated that most members (including herself) decided to be patient and not incorporate any impacts for the moment. 
• On the biggest risks the US economy is facing most of them were external: Brexit and credit growth in China.”   

“All in all, the Chairwoman confirmed that the Fed was ready to move again at the next meeting which will be held on March 14-15. The timing appears good for the Fed with an upbeat news flow, rising inflation and a relatively quiet external environment. Last but not least, the market is ready with an implied probability of more than 95%.”

“Looking forward, without much surprise, we are changing our call for the next hike to March (from June) and given the recent Fed’s change of rhetoric we now expect the Fed to hike 4 times this year (March, June, September and December) above market expectations of 3 hikes.”