What a Fed Rate Hike in March Would Imply

On Monday, a combination of domestic and international factors contributed to a significant reassessment by market participants of the probability of a Federal Reserve interest rate hike in March. Now the markets are pricing in a more realistic probability of 52 percent, up from less than 40 percent last week. Where this probability assessment goes next increasingly depends on a single data point, which could also fuel a gradual reorientation of the Fed’s approach to monetary policy and how the U.S. central bank interacts with markets.

Market expectations of a March rate hike were boosted by a clarification by Robert Kaplan, the president of the Federal Reserve of Dallas and a voting member of the policy-making Open Market Committee. In referring to previous signals from Fed officials that the central bank would likely raise rates “sooner rather than later,” Kaplan said this would imply a hike in the “near future” -- this on the basis of stronger economic growth in 2017 and the need to lower the risk of monetary policy falling behind the curve on inflation.