Update: the March odds continue to surge and are now at 72% and rising.
The Fed is really doing its best to convince the market that a March rate hike is coming, and it seems to be working.
First, it was Philly Fed president Patrick Harker, who speaking at Temple University reiterated his comments from February 15, and said that not only is the economy in pretty good shape, but that he continues to see three rate increases as appropriate in 2017.
Then, moments later San Fran Fed president John Williams, seapking in santa Cruz, said the Fed needs to ease its foot off gas gradually to avoid economy that’s “too hot”, and said that a rate increase is “very much on the table for serious consideration” at FOMC’s March 14-15 meeting. Williams, formerly an uber dove, also said that "right now interest rates are abnormallyh low."
Finally, moments after Williams, NY Fed president Bill Dudley spoke in a CNN TV interview – an odd venue for a FOMC member – and said that the case for a Fed tightening has become "a lot more compelling", adding that the phrase "fairly soon" used in the Minutes, means in the relatively near future. He also said that 3% growth is possible under certain condition, and further said that the Fed can't overreact to every stock-market move. He concluded that while "sentiment has improved markedly", confidence gains "haven’t translated yet into spending."
And result, Eurodollar and Fed Fund futures traders reacted as if stung, and trading below 50% earlier today, the March rate hike odds have soared as high as 68% over the past hour – they were at 54% before Dudley started talking – effectively above the Fed's permissive threshold. As a reminder, the Fed usually hikes only if the market prices in at least a 70% probability of such an event. Well, we are now almost there.
One question for now remains – why is the dollar not following through?
There hasn't been much in the way of economic news in the past few days. Durable goods orders and GDP were weak; consumer confidence was strong. Fed speak was repetitious. But Fed funds futures hike probabilities have shot to 54% from 37% since Thursday.
One idea is pure manipulation. A bank that wants to see a hike might be buying Fed funds futures to try and somehow manipulate the Fed's thinking.
Or it could be some other kind of leak from the Fed?
Or maybe someone is just making a big bet it's going to happen as they take a closer look at the data.
What's curious is that the US dollar hasn't gone along for the ride. That suggests it's not fundamental.
While on the topic we note that 1 Year OIS topped 1.00% for the first time since Nov 2008…
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