Fed Likely to Hold-off on Rate Hikes in March, Though All Eyes on Fed Meeting Wednesday

Cautious optimism is the name of the game

It’s a busy week in the financial markets with many significant announcements and reports ahead. The events which punctuate our economic calendar this week all have one thing in common; investors are looking to establish trends which seemed to have budded in December and January in the US economic arena, and may confirm themselves in February data coming out this week. The events this week could help set the tone for the end of Q1 not to mention the rest of 2016, with a clear emphasis on the anticipated rate hikes this year.

The highlight of the week is undoubtedly the Fed meeting on Wednesday, which will include reports on the Fed’s economic projections for inflation and growth over the next 2 years as well as the FOMC officials’ individual projections of interest rates. The meeting will be followed by Chairwoman Janet Yellen’s quarterly press conference. This week there is quite a fair amount of data coming out of the US, with much of the data releases building up to the big event on Wednesday, in the minds of investors and policy makers alike. Consumer Spending, inflation and industrial output are all data releases we are anticipating in the US this week.

Though the clear highlight for this week is the topic of interest rate hikes, there is a wide consensus that there will be no interest rate hike at the Fed meeting this Wednesday. However, the statements and the press conference in particular, will be analyzed for any clues about the increase which will probably take place later on in the year. Investors know that chances are slim for any increase this time due to the recent volatility and with inflation still low, and that the Fed has no real incentive to act now. This is further reinforced by the Fed’s will to be conservative at this time; they are likely to hold off and wait patiently for more data before any increase in interest rates is made. If we are all caught off guard and a rate rise is announced this week, it will indeed come as a surprise and would most likely shake the markets. As we all know, due to investors’ aversion to any form of surprise, the market would probably react negatively.

Wednesday will be the first time the Fed is meeting since it raised its key short-term interest rate in December for the first time in seven years, ending an era of near-zero rates. In that meeting, the individual projections of FOMC officials showed they expected four rate hikes in 2016 in total. In January, the rates had remained unchanged. In that meeting the Fed did express caution about the recent volatility and fragility in the economic arena, though since then, things have been looking up.

There is also concern sparked by slowing global growth and mixed inflation data. Others are deciding to focus on the glass half-full and look at the recent steady job gains and solid household spending. Whatever the focus is, it is clear to all that rates will be increased this year; but the disagreement lies with how many hikes will occur, and when. The range of opinions is quite wide; with expectations spanning from 1 to 6 hikes to take place by the end of 2016.

Zooming out, it is important to remember that rate increases are one of the signs of a healthy, growing economy. In a wide assessment, it is safe to say that the situation is an optimistic one. It is classic that consumer behavior drives markets up, and rate hikes are a response to that. It is after a certain tipping point that rate increases can become detrimental to the economy. There is no doubt that we are now in the former part of the rate hike reasoning; not the latter; and it seems that rate increases at the moment, amidst all the noise and volatility, could signify a strengthening economy. It seems that the Fed can see through the noise and is also cautiously optimistic. Having said that, the Wednesday meeting is taking place shortly after the European Central Bank cut interest rates on Thursday. On the background of a weakening Eurozone, the Fed will proceed with an added layer of caution, even though all the healthy signs of the US economy are noted and the path seems to be clear for positive progress.