Will Janet Yellen signal a hawkish lean of the FOMC?

Forex markets are gearing up for impact of the Federal Open Market Committee. The Dollar Index has been largely consolidating for several days now as traders have been reluctant to take too much of a view on the dollar ahead of what could be a crucial announcement from the Fed tonight. At 1900BST the announcement of monetary policy will be made via a statement that summarises the meeting of the FOMC. Although it is highly unlikely that the Fed will decide that June will be the month when they engage the first move in the Fed Funds target rate since December 2008, this could still be an extremely interesting meeting. It could be a meeting that Fed chair Janet Yellen signals a hawkish lean on the FOMC and guides for an imminent rate hike.

yellenWill there ever be a “right time” to hike rates? After having held rates at emergency levels for so long, where financial markets have seen the accommodative stance by the Fed as being their life blood, the first move is always going to be highly debatable. However, in recent weeks it seems as though the US is getting over its winter wobbles, as data prints have been picking up. The improvements in the ISM Manufacturing, core CPI, Non-farm Payrolls, Average Hourly Earnings, Retail Sales, Michigan Sentiment are all positive for the economy. however there is always the argument that “one swallow does not make a summer”. This should ensure that the FOMC holds off from any hike this month and waits for at least one more further batch of data to confirm the improvement. The market subsequently is not anticipating a move today.

However, what will be included today are the latest economic projections and also the “dot plot” of the FOMC’s expectation of the rate path. Both could easily include changes that result in the increased likelihood of a rate hike in Q3 this year.


The March meeting was the last time the Fed put together its economic projections and the table above shows that the weak data points that had been a feature during the winter months had a significant impact on growth and Personal Consumption Expenditure (the Fed’s preferred measure of inflation) expectations. There were subsequently downgrades to the December data. However, since the March meeting there has been a bottoming in the data (especially for inflation and also earnings growth). This is likely to mean that these projections are subsequently bumped up again. There are also likely to be changes to the “dot plot” table. March’s plots are below.

fed dot plotThis is another way in which the Fed could show a more hawkish turn. The “dot plot” is a way that the Fed shows its views on the speed of potential rate hikes. The table above shows that in March the committee expected rates to be c. 0.625% by the end of 2015, or in other words having one or two hikes by the end of this year. By the end of 2016 the March dot plot shows the FOMC forecast a further 1% hike in rates, with terminal rates topping out around 3.5% to 3.75%. The speed of the hikes is probably more important that the timing of the first hike. How the committee members place their dots could be another way in which the FOMC could show a hawkish move.

Finally, at 1930BST, the press conference where Janet Yellen will field a host of questions, the vast majority of which will be angling for hints at not only when the Fed will hike rates but also how quickly. Yellen is still rather dovish at heart and is likely to stress that future rate hikes will be gradual. Quite how she fields these questions will be telling. (This concept of gradual hikes could also find its way into the FOMC statement too potentially.).

Although the FOMC is not expected to hike rates in June, it is also not expected to do so in July. Having waited for over 6 years since the last change in the Fed Funds target rate, the FOMC is unlikely to make a move at a meeting where no economic projections or press conference is held. This is why September becomes an even more likely month for a hike (or even December).

A hawkish lean by the Fed today could usher in renewed dollar strength. The reaction on equity markets is harder to gauge as the tantrum that greeted the prospect of the tapering of QE last year suggested that markets were not overly enamoured by the removal of the accommodative monetary policy. However, traders have had plenty of time to get used to the idea, whilst bond markets have already factored in the beginning of the tighter rates. The 10 year Treasury yield is around 70 basis points higher now than it was at the key February low.

It is close to the time of the first rate hike, but not this month. However in this era of forward guidance, there is always room for a hawkish lean.

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