“That Wells Fargo note is looking pretty prescient right now” – said no one, anywhere ever.
Recall this from Wells out February 3:
The Fed rarely tightens unless the market is pricing at least a 60% of a rate hike one month before the FOMC meeting. Figure 7 underscores this point. The Fed has implemented 25 bps hikes on 27 occasions since 1991. Twenty days before the hike, the implied probability was below the key 60% level in only three of the 27 cases. The Fed tightening in December 2016 fit the historical pattern. The rate hike was very well advertised by the Fed, and the implied probability was about 80% a month before the FOMC meeting.
Shortly after the bank wrote those words, everyone was talking about how the disappointing average hourly earnings print that accompanied the January jobs report effectively took a March hike off the table.
Oh what a difference a few weeks makes.
Following Tuesday’s super hawkish Dudley/Williams one-two punch, March odds are now above 80%:
So trade accordingly, but do note that not everyone is buying it…
The market has moved dramatically in the past two days to price in a hike at the March meeting. This was partly triggered by hawkish commentary from regional Fed presidents, including NY Fed President Dudley yesterday. While we agree that the chances of a hike in March have increased given the Fed commentary, we are sticking with our baseline forecast for the Fed to stay on hold at the next meeting and hike in June. That said, it is a very close call and subject to change depending on comments from Fed Chair Yellen and Vice Chair Fischer on Friday.