Macro of the Week – US rate hike still on the cards

The recent sell-off in markets and spike in volatility has so far been met by a wall of silence from the new Fed Chair Jay Powell. On the day of being sworn in, Powell faced a drop of 1,175 points on the Dow Jones, the biggest fall since 2011, and there were some who would have expected some sort of communication in support of the market as it has continued to fall, however this has yet to happen. It is quite possible that Powell wants to avoid a cycle of having to come out in support of markets every time there is some form of correction. With the majority of data pointing to a heating US economy, markets were pricing in 100% likelihood of the Fed raising rates at the March meeting prior to the recent sell-off. Pricing of Treasury futures show that expectations fell to a low of around 78%, with anticipation that the Fed would not want to raise rates with markets in a volatile phase and so risk another ‘Taper Tantrum’. However with no signs of a change of tack from the Fed, markets are now pricing in a 92% likelihood of a rate rise at the next meeting. Robert Kaplan, the Dallas Fed president, has said that volatility is to be expected, and that he is sticking with his forecast for 3 rate rises this year.