While markets have priced that March hike out, our conclusion after the late January FOMC meeting was that the March meeting is still “live”. While acknowledging the slow growth late last year, the Committee noted that slower inventory investment is one depressing factor thus suggesting that the weakness is temporary. Moreover, the reference to the strong labor market right in the first line of the statement effectively neutralized the growth negativity.
Meanwhile, the Fed said that it is “closely monitoring the global economic and financial developments” in January. Compare and contrast with the December statement when the Fed hiked rates at which point the committee said that it was “taking into account domestic and international developments” so the Fed was definitely more cautious in its latest statement. However, compared to the September statement when the Fed decided not to hike rates after all, the statement read “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term” – definitely more cautious wording than what we saw in the January statement.
In addition to that, the Fed declined to assess the balance of risks in the January statement thus suggesting that the Fed simply has not decided yet and the with 5-6 weeks to go before the March meeting the door to the interest rate hike was still ajar. By contrast, if the Fed had suggested that the risks to the outlook were to the downside it would effectively have shut the door not only to March but probably to subsequent meetings too.
While there are sings that wage growth are beginning to rise as it always has at this stage of the cycle, financial conditions have probably tightened more than what the Fed was looking for in December. As such, our forecast is that the Fed ultimately will decide to hold rates steady not only in March but at subsequent meetings too. Our forecast is for the next rate hike in September.
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