Over the last few days, several events and data releases in the US have caused the probability of a March or May US Federal Reserve rate hike to become more likely. The TGM Federal Reserve Rate Movement Calculator now suggests that there is a 31% and 61% chance for a hike in March or May respectively, both up 14% and 16% since yesterday. This was the result of strong CPI and retail sales data. We saw the headline CPI rise 0.6% mom in January, which was double the market expectations, and subsequently lifting the annual inflation rate to 2.5% yoy. We also saw strong growth in the price of goods, which resulted in an increase of 0.3% or 2.3% annually for the core CPI. This is above the Federal Reserve’s target of 2%. The retail sales report also surprised the market by coming in at a growth rate of 0.4% for January, which was 0.3% above expectations, this came after a 0.4% upward revision of the spending growth in December as well, which stands at 1% now. Further, Federal Reserve Chair Janet Yellen’s congressional testimony, also strengthened the case for a rate hike. Speaking about current labour market, she noted that payrolls gains of 75k-100k per month were sufficient to keep the jobless rate stable and that “In some sense I think we have enough jobs”. This would imply that the Fed thinks the economy is close if not at full employment now. Additionally, the Philadelphia Fed President Patrick Harker, who is also a voting member, noted that he was concerned about being potential behind the curve in terms of rate hikes and that he expects three this year.

FOMC Rate Change

This paints the picture for a potential rate hike in March or May this year. However, keeping in mind the comments from Fed Chair Janet Yellen’s semi-annual testimony before the Senate Banking Committee from the other day, we do not expect a rate hike in March to occur. Fed Chair Janet Yellen seemed concerned about the uncertainty around the Fiscal policy, which the Fed factors when setting interest rates. As we don’t expect to hear anything soon from President Trump, we expect the Fed to err on the cautious side and to skip the March meeting.

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