Fed should get on with it
19:00, 27 February 2017
· By CMC Markets
For the last few weeks markets have been weighing up the prospect of whether the US Federal Reserve will look to raise rates at its March meeting.
The odds of a move have fluctuated between lows of 24% at the beginning of February and a peak of 44% in the wake of Fed Chief Janet Yellen’s testimony to US lawmakers on Capitol Hill when she said that it would be “unwise” to wait too long before raising rates.
Since that January Fed meeting it has been clear that the US economy has continued to show signs of improvement, and while the probability of a Fed rate rise has now risen to 50%, certain members of the committee appear paralysed by concerns about what the new US President might look to do with respect to his tax and fiscal policy.
There does appear a broad consensus that we can expect to see at least two rate rises this year with the only unknown being around the timing of said moves.
This week’s core PCE numbers could offer further clues about that, but in any event the constant prevarication does rather beg the question as to why the Fed doesn’t just go ahead and hike irrespective of what President Trump announces in the coming days.
We could well see a catalyst for a move in March if US President Donald Trump fleshes out more detail on his “phenomenal” tax reform announcement that he promised about three weeks ago.
Today the President is due to address a joint session of Congress, and it is clear that we can expect to see him flesh out in greater detail of his new fiscal plans, with the eyes of the markets and the world on him, and with US markets continuing to push to new record highs on an almost daily basis.
We already know that he intends to spend $54bn on defence and infrastructure whilst making cuts elsewhere to pay for them.
Is the US economy so weak that a 25 basis point rise on the upper band from 0.75% to 1% will spook investors? I think not.
Fed policymakers have already acknowledged that a substantial fiscal boost in terms of tax cuts could prompt a much sharper policy response which would suggest that irrespective of what Mr Trump announces today higher rates are already needed, so why wait?
This is the problem with central bankers nowadays, we had it with the Bank of England last year, reacting in haste to a political problem, and we have it again with the Federal Reserve holding back for the same reason. Policymakers seem clear of the need for a rate rise and irrespective of the current climate surely it’s better to just do it, and then react to any changes as and when they happen, after all that’s what we pay them to do.
It’s also a big week for Fed speakers with Fed chief Janet Yellen due to speak later this week, along with Fed vice chair Stanley Fischer, with both expected to talk about the US economy and monetary policy. These speeches could well give markets a clearer idea of where we are vis-à-vis a Fed rate rise.
It is more than likely that any plans that Mr Trump announces will take time to deliver which means that any effect on the economy will also be slow to arrive, unless of course the Fed knows something we don’t and is deliberately prevaricating.
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