Posted by on March 1, 2017 10:45 pm
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Categories: Banking Business Committees Economy Fed Fund Futures Federal funds rate Federal Open Market Committee Federal Reserve Bank of New York Federal Reserve System Finance Financial economics Harvard headlines Inflation John Williams Lael Brainard money NY Fed US Federal Reserve William Dudley

One day after a duo of Fed presidents unleashed the biggest plunge in 2 month Fed Fund futures since 2008, sending March rate hike odds from 50% to 80% in under two hours…

…and resetting the market’s expectations for a March Fed meeting, which suddenly went “live” after NY Fed President William Dudley and SF Fed chief John Williams signaled in separate speeches Tuesday that a rate hike will be considered in FOMC’s March meeting, moments ago the Fed’s uberdovish governor Lael Brainard joined the hawkish parade when in prepared remarks for an event at Harvard, she said that “assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.”

She also said that “we are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time.”

Once the headlines from her speech hit, the USDJPY saored, and has since hit intraday highs, on renewed expectations that another 25 bps rate hike may be due as soon as March 15, when the next FOMC meeting takes place.

Some other hawkish statements:

  • “The past few months have seen continued progress in the labor market.”
  • “Inflation has moved up lately as the effect of past increases in the dollar and declines in energy prices have faded”
  • “Core inflation has been below 2% target, and further progress is needed to reach and sustain symmetric inflation goal”
  • “Recent months have seen an increase in the upside risks to domestic demand.”
  • “Near-term risks to the United States from abroad appear to have diminished.”
  • “How fiscal policy affects the economy depends on a lot of things, and of course there’s a lot of uncertainty,”

Brainard also touched on another sensitive topic, namely the Fed’s balance sheet, saying that “as the federal funds rate continues to move higher toward its expected longer-run level, a transition in balance sheet policy will also be warranted.” She also added that “there are good reasons to expect a normalized balance sheet to be considerably smaller than its current size but larger than its pre-crisis level.”

Some additional observations on her comments from Stone McCarthy:

  • The March meeting is squarely in focus for a possible rate action in the wake of strong economic data and measures of inflation at long last nearing the Fed 2% objective.
  • Most policymakers are still speaking in terms of gradual hikes, but also moving “sooner rather than later” to avoid having to more sharply increase rates if growth and/or inflation starts to pick up.
  • Recent comments from Brainard’s fellow FOMC participants certainly suggest that hawkish sentiment is growing among the voters. However, only Chair Yellen speaks for the FOMC as a whole and it is her remarks on Friday at 13:00 ET that will be decisive.
  • Brainard said, the economy is “closing in on full employment” and inflation is moving “gradually” back to target, and that “it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path”.
  • Brainard mentioned “increased focus on the balance sheet”, and that it will need to be adjusted relative to the fed funds rate depending “on the degree to which they are substitutes”. Might prefer fed funds rate as “sole active tool away from the effective lower bound”. Once well away from lower bound, “balance sheet would be set on autopilot” to shrink “in a gradual, predictable way”.
  • Near term risks from abroad are “diminished” and overall risks are about balanced.

But it was Brainard’s last statement that was the most interesting, if not ominous: “We are going to be in a slightly different kind of posture, I think, going forward.”

Hint aside, all of these statements could be merely trial balloons to test the market’s preparation for an upcoming rate hike: for the real arbiter look to this Friday’s speech by Janet Yellne: if she turns as hawkish as her FOMC peers, than a March hike is effectively assured, especially with the March hike odds now at or around 70%.

Watch Brainard live below:

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