h2>US: Dudley, Williams talk up prospects of March hike

After looking quite foolish for much of this quarter, our forecast of a March Fed hike is now gathering greater momentum, and according to Fed funds futures and the Bloomberg implied rate probability function, markets are now pricing in around 80-85% probability of a March hike. Importantly, one of what we term the Fed “insiders”, the NY Fed President, William Dudley, said overnight that the case for tightening had become “a lot more compelling”, and that “the risks to the outlook are now starting to tilt to the upside” He was joined in sentiment by San Francisco Fed Chief, John Williams, who said that an interest rate increase would receive “serious consideration” at the next meeting. We might quibble over the exact numbers delivered by Bloomberg, but whatever the actual number, a March hike would no longer be a market surprise – about the only credible excuse left to the Fed to delay hiking on March 15. Whilst this looks very comforting for our long-held outlier house view (which we expect to be joined by the consensus of forecasters over coming days), there are still a few more hurdles to cross before we can claim that this hike is “in the bag”. Firstly, the PCE date released on 1 March – should take PCE inflation to 2.0%, and eradicate the only target the Fed has not yet hit, given that rising wages signal that full employment was reached some time ago. And there is still a possibility of a disappointing Labour market report on 10 March – though we are actually expecting this to another good release, especially on the wages front, where we see scope for a strong upside surprise.