Fomc Members Keep March Rate Hike Alive. Market-Based Probabilities

1719 WordsMar 5, 20177 Pages
FOMC Members Keep March Rate Hike Alive Market-based probabilities for an increase in the federal funds rate at this month’s Federal Open Market Committee (FOMC) meeting have recently surged. Originally, the emergence of hawkish views from two regional Federal Reserve Bank Presidents, namely John Williams (San Francisco) and William Dudley (New York), along with, more recently, Fed Chair Yellen have produced a significant resetting of expectations. The FOMC has become an extremely democratic institution over the past two decades. Consequently, members do not feel any inhibition about conveying their policy views in the public domain. It is, however, important to remember that not all FOMC members carry the same clout at any given meeting.…show more content…
Ideally, members would like to see lower levels of U6 labour market underemployment, but they are also cognisant of the need to make a pre-emptive strike against a build-up in inflationary pressures without damaging labour demand. Fed officials have been warning financial markets to expect a faster pace of tightening in 2017 versus last year. Policy changes need, however, to be put into context. The FOMC’s current baseline economic outlook would suggest 2 or possibly 3 rate hikes during the year. These would happen in June and December, along with September if there are 3 hikes. Meanwhile, markets have become jittery about whether the FOMC plans to boost the number of rate hikes this year. Ultimately, unfolding economic data will determine any changes to the FOMC’s baseline economic outlook, and, consequently, the forward policy path. To justify an increase in the federal funds rate being brought forward from June to March, the FOMC will need to play a hunch about evolving economic data, as well as potential developments in the realm of fiscal policy. Furthermore, members also need to decide whether unfolding economic data risks blowing the Fed off course in achieving its dual mandate without resorting to a faster pace of tightening. New York Fed President Dudley recently provided some useful insights into how policy conduct may evolve.

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