From Mark Cudmore, a former FX trader who writes for Bloomberg
March Hike Is Now Base Case as U.S. Data Game Shifts: Macro View
Lael Brainard’s hawkish comments confirm that a March rate rise must now be the base case for investors, and it’s unlikely the upcoming data even matters.
Brainard is not only part of the Fed’s core, she’s arguably the most dovish member of it. When she sends a hawkish message, you need to pay attention.
I didn’t believe a March hike was coming. I was wrong. Brainard’s speech wasn’t an anomaly -– Dudley had laid the groundwork already on Tuesday.
It’s not a completely done deal, but investors must now be studying the calendar to see what could derail a March hike. How quickly things change. Only a week ago, we were debating what could be the catalyst to make March likely.
The key inflation data came out last night and hardly presented a compelling case for monetary-policy tightening. In fact, the broad data picture has been more indicative of an economy that could probably cope with a hike rather than one at risk of overheating and in need of tightening.
This implies that the Fed’s motivation for tightening is more related to the resilient sentiment of markets rather than data-driven. Perhaps annoyed by its failure to raise rates by more earlier in the economic cycle, it is now keen to hike whenever it’s confident it can get away with it.
The corollary is that any data disappointment in the next two weeks will be unlikely to stop the Fed from tightening, and only a severe market correction will stop them acting now. And we haven’t seen one of those in more than a year.
The consequences of a March hike are not yet fully priced. Many in the market will wait for Janet Yellen’s Friday message to confirm the plan. That may be prudent, but don’t look to the data calendar to save you.
Always remember when trading, the only relevant question is “will they hike?” Not “should they hike?”