FOMC to raise the fed funds target range by 25 bps to 0.75%-to-1.00% - BMO CM

Michael Gregory, Head of US Economics at BMO Capital Markets, suggests that they are looking for the FOMC to raise the fed funds target range by 25 bps to 0.75%-to-1.00% (an 88-bp midpoint) and if there was any doubt about the Fed acting, Friday’s employment report sealed the deal.  

Key Quotes

“We look for the FOMC to raise the target range for the fed funds rate on March 15th by 25 bps to 0.75%-to-1.00% (an 88-bp midpoint), with the other policy rates following suit (interest rate paid on reserves to 1.00%, overnight reverse repo rate to 0.75% and discount rate to 1.50%). Note that we will now be just one more move away from every policy rate sporting a “1 handle”.”

“If there was any doubt about the Fed acting, Friday’s employment report sealed the deal. Nonfarm payrolls increased 235k in February, very similar to January’s upward revised 238k. Indeed, both prints have come in above their trailing trends (3-, 6- and 12-month averages), meaning hiring is gaining momentum (when steady momentum was sufficient for the Fed). Turning to the four “ratios”, we won the superfecta! The unemployment rate fell a tenth to 4.7%, while the participation rate rose a notch to 63.0% (the latter matched a near 3-year high). The broadest labor underutilization metric, U6, fell two-tenths to match its cycle low of 9.2%. And, the employment ratio rose a tenth to 60.0%, hitting a new cycle high. Finally, average hourly earnings growth accelerated to 2.8% y/y from 2.6% in January, back near the top of the recent 2.4%-to-2.9% range.”

“So here’s how we think things will play out on Wednesday:

• Policy statement: Apart from the rate hike itself, we suspect the other major change will involve the risk assessment, with the previous “roughly balanced” phrase becoming more neutral (say, just “balanced”). There is also a small chance the Committee could conclude there’s now a net upside risk to the economic outlook, reflecting the post-election surge in financial market and economic optimism that is already translating into tangible activity (e.g., home and vehicle sales along with capital goods orders and hiring). And, there’s still potentially stimulative fiscal and other government policy waiting in the wings.
• We anticipate no change in guidance concerning reinvestment policy, despite recent market buzz and some limited official chatter. Rolling over 100% “until normalization of the level of the federal funds rate is well under way” should be repeated. It begs the question: How much is “well”? With a 3% longer-run terminal rate, we figure it’s at least around 1½%, making this a probable 2018 policy development.
• There could be a dissent (on the dovish side). Seven of 10 voters have already revealed some amenity to move next week. Of the three remaining members, it is Governor Tarullo’s last meeting before resigning, and we suspect he will side with his four Board colleagues (Yellen, Fischer, Brainard and Powell). Chicago President Evans recently said that three rate hikes this year were not “implausible” and could go along with the majority. This leaves Minneapolis’ Kashkari, who recently argued that the labor market has “more room to run” (thus giving the Fed more policy leeway) as a possible dissenter. However, we reckon the odds favor unanimity.
• Press conference: Chair Yellen will likely emphasize two key themes: (1) Yes, the economy is doing better and this is making the Fed more confident. And (2), no, the latest rate hike is not the start of a quarterly pattern. Mostly everything else said will probably be rehash.”