On Wednesday, the U.S. Federal Reserve published the meeting minutes from the January 31 – February 1 monetary policy meeting. The minutes showed that policymakers believed that it was appropriate to hike the short-term interest rates “fairly soon.”
In an apparent reference to the president’s proposed tax reforms, the minutes showed that the tax reforms alongside increased spending could see interest rates rise much further to control inflation. The meeting minutes, however, did give any exact timing on when the next rate hike will come.
The markets, following the FOMC meeting minutes publication, saw the probability for a March rate hike rise to 27%, which is still low. This is despite the testimony from the Fed Chair Janet Yellen a week ago, where she reiterated the Fed’s commitment for three rate hikes this year. The markets are however not quite sold on that yet.
“We still believe in [a rate increase] three times, so we’re trying to stick with that assumption, but I think the feeling is getting more and more [that] there may be only two,” said Arthur Kwong, head of Asia Pacific equities at BNP Paribas Investment Partners, echoing the broader market sentiment.
U.S. consumer prices rose 2.5% as of January, while the core CPI increased 2.3%. Policy makers will, however, get to see PCE data, the Fed’s preferred gauge of inflation next week on Tuesday which will provide more insight into the timing of the interest rate hike.
U.S. dollar muted after Treasury Secretary’s comments
The U.S. dollar was flat on Thursday after the Treasury secretary; Steven Mnuchin spoke briefly about the currency. The Treasury secretary who supports a stronger currency and had in the past defended his view said that a stronger exchange rate was a reflection of confidence in the U.S. economy compared with the rest of the world calling it a “good thing” in the long run.
His comments did little to lift the sentiment in the U.S. dollar as investors await plans for the proposed tax reforms that President Trump is expected towards the end of the month. With no incentive, the dollar remained flat. The Treasury Secretary also said that interest rates were low by historical standards. On the Trump’s goal of targeting 3% GDP growth, he told CNBC that the Trump administration was committed to this goal but that it would take time. He called the 3% growth a realistic target but said that it could be expected “towards the end of next year.”
February payrolls and Trump’s speech could set the tone for March rate hike
In the run-up to the March FOMC meeting, which is due to take place on March 14 – 15, policy makers will be looking at two, if not three key events that could shape the outcome of the March rate hike decision.
The first will be next week’s PCE data which is likely to shed more light on inflation. The PCE figures have been lagging the consumer price index data so there is a chance that the PCE figures might be as exciting as the CPI numbers. Secondly, next week will also see the U.S. President Donald Trump address Congress. It is highly likely that he will be announcing the tax cut proposals during this event, which could be seen as an additional catalyst for the Fed to consider if indeed the tax cuts will have any follow on effects on inflation.
Finally, the February payrolls report is the week ahead on March 10th. While the average number of payrolls has been healthy, wages have become the weaker link. However, if there are any signs of an improvement, it is quite likely that the Fed would prefer to hike rates in March.
Amid all of the above, the Fed enters a ‘Blackout’ period starting March 1st, which means that the markets will not get any feedback on the PCE data, or the Fed or the jobs report, which could possibly push the March FOMC into a nail-biting finish.