Calmer markets, positive data prime Fed to push ahead with rate rises

Fri Mar 11, 2016 3:11pm EST
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By Lindsay Dunsmuir

WASHINGTON (Reuters) - Barely a month ago Federal Reserve Chair Janet Yellen cut an isolated figure in her semi-annual testimony to Congress, forced to defend the U.S. central bank's data-dependent approach while around her stocks plunged and oil prices sagged.

But a recent string of positive economic news has dragged markets back closer to the Fed's overall outlook, allaying recession fears and suggesting the Fed will have more credibility at its meeting next week when it says further rate hikes this year remain firmly on the table.

"Financial markets for a while were completely out in the weeds, running around looking at things that turned out not to be real risk," said Torsten Slok, chief international economist at Deutsche Bank.

When the Fed raised its benchmark interest rate in December for the first time in a decade from near zero, its so-called "dot plot" of policymakers' forecasts penciled in four quarter-point hikes this year. Markets at the time priced in three increases.

Fed policymakers meet on March 15-16. They are expected to hold interest rates steady and are seen likely nudging down their expectations to three hikes for 2016.

As recently as two weeks ago, investors and traders had priced out any rate rise this year. They currently expect one, according to an analysis of fed funds futures by the CME Group.


U.S. Federal Reserve Chairman Janet Yellen holds a news conference to announce raised interest rates in Washington, in this file photo taken December 16, 2015. REUTERS/Jonathan Ernst/Files