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The Fed is sending a strong message about a March rate hike, and one report could clinch it

The Fed chorus about a possible March interest rate hike is getting much louder, and an upcoming inflation report could clinch what was until recently considered a long shot.

The latest Federal Reserve official to push the the group's March meeting into play was New York Fed President William Dudley, viewed as a close ally of Fed Chair Janet Yellen and a central figure in the Federal Open Market Committee. Dudley said on CNN International Tuesday afternoon that the "case for monetary tightening has become more compelling."

Four Fed presidents spoke Tuesday, and all indicated an interest rate hike could be considered in March. "All are on the same page, including hawks and doves, and especially Dudley," said Tom Simons, money market economist at Jefferies.

Treasury yields shot up after Dudley's comments. The 2-year yield reached 1.28 percent, its highest level of the year, and well off the day's low of 1.16 percent. The 2-year note is the most sensitive to Fed rate hikes.

"He stoked the flames. When he says the case for tightening is a lot more compelling, to me that's a sign that they are getting things together for March now," said Simons. Most Fed watchers have been forecasting a June rate hike, though strong inflation and retail sales data and hawkish comments from Yellen raised the odds for March and May in recent weeks.

Odds got even higher as more Fed presidents chimed in about a March hike. By some measures, the market odds for a March hike jumped to about 70 percent from

William C. Dudley, Janet Yellen and Stanley Fischer in Jackson Hole
Sabrina Korber | CNBC
William C. Dudley, Janet Yellen and Stanley Fischer in Jackson Hole

just over 50 percent after Dudley's comments, according to Peter Boockvar of the Lindsey Group.

Inflation data scheduled for Wednesday could be a key factor in driving even more momentum toward a March hike. While the Consumer Price Index has been risen well above 2 percent, the Fed's preferred measure of inflation has lagged. The headline personal consumption expenditure price data could now show an increase of 2 percent for the first time in nearly five years when it is released at 8:30 a.m. ET Wednesday, Simons said.

The Fed has long been targeting 2 percent inflation, and the PCE index has stubbornly lagged.

The other data the Fed will view as key for a March hike is the February employment report, expected on March 10. Labor has been a strong pillar for the economy, and if that report shows consistent job growth, the Fed could have the all clear, barring some unforeseen event. The weakness in wage gains in the January report was one factor that discouraged the market from expecting a March rate hike.

More clues are expected to come Wednesday evening when Fed Governor Lael Brainard speaks at 6 p.m. ET. Brainard is also close to Yellen.

Yellen speaks on Friday at midday.

"Brainard could be a preview of Yellen," said Deutsche Bank chief U.S. economist Joseph LaVorgna. He said Dudley and the governors are the most important Fed speakers, and the batch of other Fed presidents is not as meaningful.

Brainard speaks in Cambridge, Massachusetts at 6 p.m. Wednesday's Fed speakers include Dallas Fed President Rob Kaplan, at 1 p.m. ET. On Tuesday, he told CNBC that the Fed should be in the process of removing "accommodation" in its monetary policy.

"Hopefully, we'll see some consistency in the commentary of Brainard tomorrow, and if we see something neutral to slightly hawkish from Yellen Friday, you'll have to lock it in. The fact you had Harker, Williams, and Dudley all basically speaking at the same time and trying to make it clear a rate hike is coming is interesting four days before the blackout begins," said Simons.

Besides Yellen, Fed Vice Chair Stanley Fischer speaks at midday Friday.

"Yellen could always throw cold water on it," he said, adding Trump's comments on spending and taxes in his speech to Congress Tuesday night could be important if they provide more detail. The Fed has been trying to assess the impact of Trump's policies on the economy, but it has not had much hard information.

LaVorgna said he is watching the PCE deflator as well as consumer income and spending, also released at 8:30 a.m. Economists watch the core PCE, and that is expected to show a 1.8 percent year over year gain.

"The last few months, the core PCE has been on the lower side, and the issue is whether that will extend into January. I don't think inflation is going to pick up a whole lot, despite what we've seen in core CPI. The market is fixated on core PCE because if you get a surprise, the probability of a Fed hike goes up even further," said LaVorgna.

Fed presidents have been lining up to make clear that March is a "live meeting," and an interest rate hike will be on the table. Fed watchers, however, have not embraced that time frame, with many sticking with expectations for no hike until June.

Wednesday's data also includes important ISM manufacturing data at 10 a.m. and Markit manufacturing PMI at 9:45 a.m. There is also construction spending at 10 a.m. and the Fed's beige book at 2 p.m. Monthly vehicle sales are also released.

Earnings are expected from Best Buy, Lowe's, Dollar Tree, Mylan Labs, Luxottica Group, Crocs and Windstream before the opening bell. Broadcom, Planet Fitness and Shake Shack report after the closing bell.