Source: Mark Turnauckas
Don't freak out. But are you prepared for rising interest rates? It appears as though the Federal Reserve is gearing up for one ahead of their March meeting. Rates could rise a lot faster, in 2017, than investors currently think.
Why the Fed Will Raise Rates Faster Than Expected
#Fed #RateHike #FOMC
Don't take our word for it, here's a smattering of comments from Fed heads yesterday:
- "The case for monetary policy tightening has become a lot more compelling," New York Fed President William Dudley told CNN yesterday. "After the election we've seen very large increases in household and business confidence, we've seen very buoyant financial markets."
- "In my view, a rate increase is very much on the table for serious consideration at our March meeting," San Francisco Fed President John Williams said in a speech yesterday. “The aim is to keep the economic expansion on sound footing — not too hot, not too cold — that can be sustained for as long as possible.”
- "I see three hikes as appropriate for 2017, assuming things stay on track," Philadelphia Fed President Patrick Harker said in prepared remarks at Temple University yesterday.
Harker and Dudley are both voting members of the Fed's Open Market Committee. Williams isn't. Still, there are seven meetings left in 2017 so the fact that there appears to be more urgency around raising rates earlier than was originally expected in 2017 is interesting.
Investors heard this message loud and clear. After this trifecta of Fed Heads spoke, here's what investors priced into the Fed Funds futures market this morning, writes Hedgeye CEO Keith McCullough in today's Early Look:
- Probability of a March rate hike spiked to 80% today
- Probability of a March rate hike was only 52% yesterday
- Probability of a March rate hike two weeks ago was only 34%
Bottom Line
Maybe, just maybe, the Fed is waking up to economic reality. U.S. economic growth and inflation are accelerating. Most recently, year-over-year growth in both retail sales and inflation are near or above 5-year highs.
We don't think investors, or the Fed, fully appreciate that the U.S. economy and inflation will heat up even further, especially heading into the second quarter of 2017. It was encouraging to see the Fed commentary yesterday, even if they are playing catch-up.
(Click here to read our recent piece, "Trump's Fed Pick: Who Will Replace Yellen? The Hawks Come Home To Roost")
