When Will The Fed Hike Interest Rate?


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According to Chief Economist Jans Hatzius at Goldman Sachs, Feds will hike interest rate in 2016, especially after today’s Nonfarm Payroll which showed strength in the US labor market despite of a severe winter.  Here are the highlights for NFP on March 7, 2014:

  • Two-month Net Revision: +25K v +34K prior
  • Birth-Death Adjustment: +124K v -307K prior
  • Prior Change in Nonfarm Payrolls revised higher from +113K to +129K
  • Underemployment Rate: 12.6% v 12.7% prior
  • Change in Household Employment: +42K v +638K prior
  • Civilian labor force Participation: 63.0% v 63.0% prior
  • Number of unemployed: 10.45M v 10.2M prior
  • Labor force: 155.72M v 155.5M prior

As we can clearly see, the pleasant surprise from the latest NFP release not only confirms Fed’s decision to continue with taper, but also adds speculations for an increased pace of tapering, especially considering how the labor market remained unfazed despite severe weather conditions that even the head of Federal Reserve Yellen  herself expressed concerns in recent testimony.  Seeing how the NFP surprised the market in February, it’s reasonable to expect that weather conditions in March and April will only be better, which adds more optimism to the USD, to say the least.

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Going back to the subject of Fed rate hikes, here are what some Fed officials are saying:

  • (US) Fed’s Lacker (hawkish, non-voter): Would not oppose a more rapid pace of tapering; reiterates preference for first rate hike in early 2015
  • (US) Fed’s Yellen: US economy has come a long way, but still falling short of Fed objectives; will build on Bernanke’s legacy of transparency.  Note: In short, Yellen would prefer to wait for tapering to end in 2014 before considering rate hikes, which matches most market and Fed official’s views.
  • (US) Fed’s Fisher (FOMC voter, hawk): There are increasing signs bond-buying overstayed its welcome; Supports the start of the taper.
  • (US) Fed’s Williams (dove, FOMC non-voter): My personal view is that the first rate hike will be around mid-2015, could be earlier or later depending on the economy- Expects unemployment to keep falling over the next few years to a more normal level in 5% range – Sees 6.25% unemployment rate by the end of 2014, 5.5% at end of 2015 – Sees 2.5% growth in 2014, 3.0% growth in 2015.
  •  (US) Fed’s Plosser (hawk, voter): Recent weather makes it hard to get a handle on data due to weather- Sticking with current forecasts for now.
  •  (US) Fed’s Dudley: Still optimistic about the US economic outlook; will do better in 2014 than 2013; Bad weather has made interpreting economic data harder – Fed and market thinking on a first rate hike in mid-2015 are aligned.
  •  (US) Fed’s Lockhart (moderate, FOMC alternate): Only much worse economy, intense disinflation would pause tapering- Sees 3% annual growth pace following soft Q1. – Does not see first rate hike until H2 2015.

In conclusion, all comments are pointing to a 2015 rate hike by the Feds, and aside from any unforeseeable surprises, market expectation should maintain a strong support for the USD and intensify as we approach to the end of 2014 or when taper ends.  This is once again another confirmation that it’s probably more probably to expect a 110.00 on the USDJPY than 95.00 (or 1.3000 on EURUSD than 1.4500).







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