The Odds Of March

Investors should fade the recent increase in expectations of a March rate hike by the Fed.

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In the current cycle, the Fed has not lifted rates without having first guided market expectations in the months leading up to the hike. As can be seen in the above chart, rate hike probabilities implied by fed funds futures were already well above 50% one month prior to each of the last two rate hikes. If there was a strong desire to lift rates in March, Yellen would have likely sent a more powerfully hawkish signal in her testimony last week. Instead, Yellen chose not to mention the March meeting specifically and said only that the Fed would continue to evaluate the case for further rate hikes at its upcoming “meetings”.

Besides the lack of a clear signal from Yellen, still-low inflation and elevated policy uncertainty will keep the Fed on hold until June.

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