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Fed's Hawkish Hold

Marc Chandler profile picture
Marc Chandler


  • Rate hike highly unlikely in May.
  • Risks increase for June, September and December.
  • The Fed is more confident that its objectives are at hand.

The Federal Reserve is most unlikely to raise interest rates tomorrow, but its statement should leave little doubt about the trajectory of rates over the next six months. The market has fully discounted two more hikes this year and has begun pricing in a third hike too. As of the end of April, the January 2019 Fed funds futures contract has about 20% of a third hike being discounted.

Fed officials have limited their own flexibility by hiking rates only at meetings followed by press conferences. This might have been needed in 2015 and 2016, but surely, the practice has outlived its usefulness. It effectively reduces the number of live meetings to four from eight. And if it is deemed appropriate to hike rates four times in a year, there is not much room for error. Recall that back in 2015, the Fed seemed prepared to hike rates in September, but due to a disruption in the global capital markets, arguably stemming from China, it chose to wait.

The Greenspan Fed has been criticized for raising rates predictably by 25 bp at each meeting in an early cycle. Now the Fed's own dots (forecasts) point to a hike nearly every other meeting. Is that sufficiently different to avoid the Minsky pitfalls?

Strategic ambiguity often works in the Fed's interest. What does the Fed's commitment to raising rates gradually mean? It is not precisely clear. However, we suggest that at the very least, it does not mean raising rates at back-to-back meetings. While the Fed could hold an impromptu press conference, the secrecy would be difficult to manage, and we suspect Powell would not want to take such risks without a greater sense of urgency.

Indeed, a hike now would catch the market off guard and would spur speculation about the kind

This article was written by

Marc Chandler profile picture
Marc Chandler has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. A prolific writer and speaker he appears regularly on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. In 2009 Chandler was named a Business Visionary by Forbes. Marc's commentary can be found at his blog (www.marctomarket.com) and twitter www.twitter.com/marcmakingsense

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