Friday February 17, 2017 - 21:23:43 GMT
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Yellen Tries To Shift Market Sentiment About A March Hike
John M. Bland, MBA
Yellen More Hawkish Than Expected The past week was a big one for the Fed. Chair Yellen went to Capitol Hill to testify for two days. On the first day she testified before the Senate Banking Committee and on the second it was before the House. In her testimony, Yellen left the door open to a rate hike at the March 15 meeting. She also said that the Fed would consider rate hikes at future meetings. Markets generally took the tone of her comments to be more hawkish than anticipated. The only remaining stumbling bloc I see as possibly in the way of a March rate hike is the February employment data due in early March. While the January data saw a strong rise in employment, average earnings data remained disappointing. The February data cannot be reliably forecasted in ahead of time as the data are notoriously volatile. They could tip the Fed rate decision either way. So for now Yellen is maintaining maximum flexibility.
A key argument in favor of a March hike is that it would held keep the Fed on track for three rate hikes this year. As of now, with markets relatively calm, this could be an ideal time for the Fed to sneak in a modest 25bp rate hike. The central bank has recently fallen into a pattern of making rate changes only at the Four Fed meetings that fall just before the end of each quarter, and which include a pre-scheduled press conference. If the Fed hikes in March, they would then need to hike in only two of the subsequent three meetings this year to hit their three hike target and move substantially down the road towards policy normalization.
Fed Funds futures odds for a March Fed rate hike are now 38%, so markets are currently not as convinced as I am about a March hike. My odds would be more on the order of 70%, barring unforeseen developments. Markets now place the odds for a June hike at 112%. This suggests 100% odds for one hike plus 12% odds for a second one.
Shrinking The Fed's Balance Sheet As for shrinking the Fed balance sheet, Yellen said the Fed would like to reduce the Fed's balance sheet substantially once the process of policy normalization has reached the point where the Fed funds rate has stabilized. She said the Fed would prefer to hold only Treasuries, and when they start to shrink the balance sheet would prefer to let other securities run off as they mature rather than to selling off existing paper. The goal would be to gradually reduce its balance sheet in an orderly manner.
WEEKLY Forex Economic Calendar:
20 Feb Mon
00:00 US- Holiday
21 Feb Tue
All Day flash PMIs
22 Feb Wed
09:00 DE- IFO Survey
09:30 GB- GDP
10:00 EZ- Final HICP
13:30 CA- Retail Sales
15:00 US- Existing Homes Sales
19:00 US- Fed Policy Minutes
20:30 US- API Crude
23 Feb Thu
13:30 US- Weekly Jobless
14:45 US- flash Service PMI
24 Feb Fri
13:30 CA- CPI
15:00 US- New Homes Sales
15:00 US- final Univ of Mich Survey
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland co-founder www.global-view.com
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