Markets bracing for a March rate hike after Fed minutes

Summary:

• Fed minutes covering the January 30 – 31st meeting showed that policy makers could enact a March rate hike
• Officials noted that the current economic momentum would be able to sustain further rate hikes
• Some officials were concerned that inflation still remained low
• New Fed Governor, Jerome Powell will be giving his first semi-annual testimony to House Financial Services on 28^th February
• Markets preparing for three rate hikes this year, with odds of four rate hikes also rising
• Durable goods report, revised GDP, ISM manufacturing PMI stand out this week

The U.S. Federal Reserve released the minutes of the FOMC meeting held on January 30 – 31 last week. According to the minutes, central bankers were optimistic as they signaled a strong message to the markets that the economic momentum was able to sustain additional interest rates hikes this year, with the possibility of a March rate hike rising.

The meeting minutes covers the final policy making meeting that was chaired by Janet Yellen. The next Fed meeting is scheduled for in March and will be chaired by the new Fed Governor, Jerome Powell.

Powell is widely viewed by the markets to maintain the steady course from Yellen. The markets will get a first glimpse of Powell’s views on the economy as he is expected to appear for the semi-annual testimony before the House Financial Services Committee on February 28.

The markets viewed the Fed minutes as bullish as various policy makers apparently upgraded their view on the economy. A “number of participants had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the U.S. and abroad,” the minutes showed.

The Fed minutes were however mixed in some aspects. The minutes showed that officials were concerned that the pace of wage growth might not increase if the productivity growth remained low. As per the latest labor market statistics, the average hourly earnings rose 2.9% on a year over year basis in January.

The minutes suggested that the Fed could move ahead with three rate hikes this year. Odds of an additional rate hike (four rate hikes) also increased following the release of the Fed’s meeting. The March Fed meeting will also see the release of the quarterly economic projections on GDP, inflation and employment and also includes the dot plot that will indicate the policy maker’s view on where the short term interest rates should be.

Following the release of the FOMC meeting, U.S. equity markets reversed gains as bond yields were seen rising. The S&P500 index was seen closing the day losing 0.6% after the index had briefly surged 1.2% ahead of the Fed meeting.

Economic data from the U.S. remained broadly positive albeit some economic indicators turned out mixed. The U.S. home sales data showed the strongest decline in nearly three years.

Existing home sales report that was released prior to the Fed minutes showed a decline of 3.2% in January from the previous month. Data from the U.S. National Association of Realtors showed that existing home sales were down 4.8% on the year in January compared to the same period a year ago.

The decline in the existing home sales came as a surprise as pending home sales were seen rising moderately over the past two months. Some economists attributed this divergence to the fact that home buyers might be wary of rising interest rates which could eventually affect the mortgage rates.