Fed Watch: Spring Forward

Much like our clocks this past weekend, the Federal Reserve (Fed) decided to “spring forward” with its monetary policy decisions. In what had become only recently a highly telegraphed move, the voting members implemented another 25 basis points (bps) increase in the target range for the Federal Funds Rate at their March policy convocation. However, prior to this action, the markets had been operating under the assumption that the first rate hike for 2017 would happen in June, not three months earlier. So, the natural questions are: what was the reasoning behind this latest rate hike, and where does that leave potential policy decisions going forward?

As recently as Chair Janet Yellen’s Semiannual Monetary Policy report to Congress in mid-February, the Fed did not seem to be expressing any urgency or guidance that a rate increase could be imminent at its March meeting. It was only over the last two weeks that a change in the policymakers’ tenor became apparent. From an economic perspective, what apparently tilted the vote in favor of another tightening move was the fact that data had become available suggesting the Fed was very close to achieving its dual mandate: maximum employment and price stability. More than likely, the inflation part of this mandate helped to tilt the scales, as the latest reading for the Fed’s preferred gauge, the personal consumption expenditures price index, had risen to +1.9%, or just shy of the Fed’s 2% stated threshold. In addition, financial conditions, another apparent “Fed fan favorite,” and global economic activity moved in a direction the policymakers felt more comfortable with.

Thus, to prepare the markets for a move at its March meeting, the Fed needed to provide guidance, specifically from what we like to refer to as “the Big 3”: Yellen, Vice Chair Stanley Fischer and N.Y. Fed President William C. Dudley. The latter got the ball rolling on February 28 in an unscheduled interview in which he said that the case for a rate hike had become “a lot more compelling” and that it should happen “fairly soon.” Fischer followed suit a few days later, and Yellen seemed to put her final stamp on the matter at her March 3 speech in Chicago.