Chances of a Fed rate hike in March are dwindling rapidly.
St. Louis Fed President James Bullard said in a speech Thursday morning that the continuing plunge in oil prices could impact the U.S. central bank’s decision-making process. Oil is down nearly 18 percent in January alone, pulling the stock market down with it and causing worries that the U.S. economy will enter a prolonged slowdown. The S&P 500 is off nearly 8 percent for the month.
Just before Bullard gave his remarks, CME traders were pricing in about a 45 percent chance the Federal Open Market Committee would approve another rate hike at the March meeting. The committee in December raised the target a quarter-point for the funds rate it uses to influence broader interest rates. It was the first rate hike in more than nine years, and Fed officials indicated they expect four more hikes this year.
However, recent developments have brought that view into question. Consequently, the CME’s tool for tracking the probability of a hike quickly dropped, most recently indicating just a 38 percent chance of a move.
If conditions hold, the opinion from some observers that the Fed will get caught in a “one and done” strategy for hikes would gain credence.
“Low inflation expectations may keep actual inflation lower, all else equal, making it more difficult for the Fed to return inflation to target,” Bullard said.
On Wednesday, Boston Fed President Eric Rosengren said in a speech growth appears to be slipping and that could force the Fed into a less aggressive rate-hiking posture. Rosengren and Bullard are voting members of the central bank’s policymaking committee.
“From my perspective, the costs of raising the federal funds rate too quickly far exceed the costs of removing accommodation too slowly,” Evans said. “So taking both of these concerns into account — and considering how I think economic conditions will evolve over time — I believe that policy should plan to follow an even shallower path for the federal funds rate than currently envisioned by the median FOMC participant.”
The remarks have reverberated through the markets.
“Bottom line, while I so badly want interest rates to be normalized, if current trends in both the economy and markets continue, I don’t see it being realistic that the Fed hikes again and Rosengren and Bullard, both voting members this year, are already showing signs of wobbling in front of the dots,” said Peter Boockvar, chief market analyst at The Lindsey Group.