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Why Credit Suisse Now Calls for March Fed Rate Hike

Jon C. Ogg

Things are looking up for the markets. Even with a political divide, the ambitions of higher growth, lower taxes and less regulation keep sending the stock market to new higher and higher highs each week. When 24/7 Wall St. projected a Dow Jones Industrial Average target of 21,422 for 2017, it was not expected that the Dow would hit 21,000 before the end of February.

While enthusiasm and animal spirits remain in the air, it may be important to not forget about the rising interest rates. Now it seems that the Federal Reserve's chances of a federal funds rate hike may be sooner and faster than what the markets were expecting. In fact, Credit Suisse has warned its clients that they should expect a rate hike by Fed Chair Yellen at the March 2017 FOMC meeting. The firm sees three rate hikes between now and February 2018.

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If Merrill Lynch raised its S&P 500 to 2,450 (from 2,300 previously), maybe the yin-yang between stocks and interest rates should be no real surprise.


Credit Suisse's call for an interest rate hike in March is based on higher core U.S. inflation and economic data pointing to strong global growth momentum. Other driving forces are the Fed’s rhetoric becoming increasingly hawkish and some Fed presidents even signaling a hint of urgency.

Credit Suisse's note from James Sweeney and his economics team said:

In response to these developments the market implied probability of a March hike has risen from 25% on February 1st to over 75% now. This market action could be self-fulfilling, because it undercuts claims that the Fed needs to use a meeting to “prepare the market” for an upcoming hike.

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Janet Yellen and Stanley Fischer will both make public remarks tomorrow, but we do not expect them to disavow the recent hawkishness of Fed Presidents. We now expect a March hike, and we maintain our view of three hikes between now and February 2018, when a new Fed chair will likely replace Yellen.

Credit Suisse did leave an out that could keep the Fed rate hike from coming so soon. The report said:

Still, a March hike is hardly assured: hard (non-survey) data have not surged since the election. In fact, labor income growth has been somewhat sluggish, real retail sales have been on trend, industrial production has been good, not great, and core PCE inflation remains (slightly) below target.

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The current rate on fed funds is a target range of 0.50% to 0.75%, hardly any cause for concern. Fed funds futures at the CME were last seen trading at 99.2375 for the March contract, which implies that they will be above 0.75% after the FOMC meeting.

One problem in evaluating fed funds today is that it implies a rate of 0.7625%, and that does not signal a fully priced-in target range of 0.75% to 1.00%. Fed fund futures for April were last trading at 99.15 and 99.12 for May, and 99.05 for June. If a March rate hike isn't coming, it has to be coming within the next 30 to 60 days.

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After the March 14 to March 15 FOMC meeting, the next meeting is May 2 to May 3, and then again on June 13 to June 14.

Is it possible that if a rate hike comes it will drop the formal range and adopt a raw target as in the old days?

Stay tuned.

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