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Fed outlook: Beware the Ides of March

By: Eaton Vance
Harvest Exchange
March 2, 2017

Fed outlook: Beware the Ides of March

Andrew Szczurowski, Portfolio Manager, Global Income Group, and Eric Stein, Co-Director of Global Income

Boston - Julius Caesar may not have believed the soothsayer who warned him to "beware the Ides of March," and everyone knows how that turned out.

We aren't sure if any of the FOMC members are fans of Roman history or Shakespeare plays. However, we do believe the recent hawkish rhetoric out of regional Fed Presidents Dudley, Williams, Harker, Lockhart and Kaplan before the March meeting is more than just coincidence. The announcement on rates is scheduled to be released on March 15 after the two-day meeting.

We think the recent FOMC speeches were in fact Fed Chair Janet Yellen's way of unleashing the cavalry to tell the markets that a March rate hike is not just a possibility, but rather the base case.

You might even say we've been here before - expecting a rate hike that never comes to fruition. However, this time is truly different for a number of reasons.

First and foremost, the market is now pricing in a hike for March, as the odds have risen from 30% to nearly 80% in the last two weeks. We've all heard the Fed doesn't want to surprise the market, and likes the probability of a hike to be at least 70% going into a Fed meeting in order to do so.

What you may not have heard is that there has only been one meeting over the last 25 years in which the market was pricing in a greater than 50% probability of a hike and the Fed didn't follow through.

The Fed also looks very closely at financial conditions, and all signs are showing a green light for a March rate hike. The stock market makes new all-time highs seemingly daily, credit spreads are hovering near their tightest post-recession levels, and the trade-weighted dollar is actually weaker than the last hike in December. Finally, the economic and inflation data we have seen recently has been coming in on the hot side, providing further supporting evidence for a March hike.

Bottom line: We believe a rate hike in the "relatively near future," as New York Fed President William Dudley said this week, is his roundabout way of saying March. Investors have been fairly warned and should be ready for a March hike.

Originally Published at: Fed outlook: Beware the Ides of March