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Overnight, Fed Governor Lael Brainard added another touch to the positive picture painted by other Fed policymakers on Tuesday, who hinted that a March rate hike may be on the way. In her speech, Brainard said that a rate hike will likely be appropriate soon given improved global conditions and continued growth. She noted that “constraints” of the past two years, caused by problems from Europe to China are easing. With regards to the domestic economy, she noted that the Fed’s employment and inflation goals are nearly met, allowing a continued gradual pace of rate increases. Given that Brainard is a Governor, which implies a permanent vote within the Committee, her comments were taken seriously by the market, which is now pricing in a much higher probability for a March hike than yesterday. According to our model which is based on the yields of the Fed funds futures, that probability has risen to 50% from 36%. Despite the recent fuss around the next hike in the Fed funds rate, and the continued increase of the probability for that to happen in March, we still believe that the recent sentiment around that prospect is more optimistic than it should be. We stick to our call that June is a more likely candidate. Despite getting positive vibes from key voting members, we still believe that the overall voting squad within the Committee has turned more dovish this year. After all, this was evident by the latest FOMC meeting minutes. What’s more, yesterday’s release of the core PCE index, which is the Fed’s favorite inflation measure, showed that the rate remained unchanged instead of rising as many had expected. The spotlight now turns to Fed Chair Yellen and Vice Chair Fisher, who are both scheduled to speak on Friday. In order to reevaluate our view, we need to see the two leading Fed officials unleashing equally hawkish signals to those of their colleagues, as well as a strong employment report next week, especially as far as the earnings are concerned.
