March Fed Funds Rate - Comes in Like a Lion and Out With a Hike

Chairwoman Janet Yellen today eluded to the fact that an interest rate hike this month is almost a certainty. With absolute clarity, she spoke about the outcome of this month’s FOMC meeting indicating that a, “March hike is likely appropriate if the economy evolves as expected.”

Speaking to the Economic Club of Chicago, one of her strongest statements announcing a rate hike was, “Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.” 

The next FOMC meeting will be held March 14 -15, and over this last week, the probability of a rate hike has jumped up exponentially. Fed Funds Futures, which creates the market-based odds, is now predicting a 97.1% probability that there will be an interest rate increase this month. Yesterday, Fed Funds Futures was predicting that there was a 78% likelihood of an interest rate hike in March, a 12% increase from earlier in the week.

Now it must be noted that the investment public at large, including professional analysts and traders, have read the tea leaves wrong on a number of important issues recently. These missteps include the referendum vote on Brexit in England, as well as our most recent presidential election. However, in the case of the interest rate hike, they might have actually gotten it right.

A March Hike Is Now Factored into Market Pricing

At this point, it seems that an interest rate hike this month is pretty much factored into the markets. Gold was under dramatic pressure yesterday and even traded to an intraday low today of 1223.  But as Yellen spoke, gold actually firmed, closing modestly higher at 1235.70, (April Comex futures contract) up $2.80 on the day.

The Dow Jones Industrial Average, which had been trading nominally lower for the morning session, also recovered immediately following Yellen’s statements and closed fractionally higher at just above 21,000.

As reported in Newsweek, “A rate hike isn’t just baked into the cake, the cake is practically decorated and ready to have the candles lit," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin. More so, recent market reactions to Fed statements are supportive of this assumption.

Wishing you as always, good trading,