Fed says yes to rate hike, but Congress may be saying no

Published Mon, Sep 28 20152:09 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Fed officials are lining up behind a rate hike this year, but odds are rising that Congress could get in its way. New York Fed President William Dudley said Monday that the Fed will likely raise rates this year, just days after Fed Chair Janet Yellen said the same thing and noted that she personally was behind it. The list of obstacles is already long, with fears of slowing global growth because of China at the top. But now congressional dysfunction has joined the list of things potentially blocking a rate hike. If it brawls over the budget and debt ceiling, and threatens to put the U.S. in default, it could wreak havoc on markets, making the Fed less inclined to hike. According to RBS, the markets are pricing in the first full rate hike for April, with 89 percent odds for March, previously 100 percent. The odds of a December hike have fallen by several points to 45 percent, and the market bet for October is at 16 percent. RBS' head of strategy, John Briggs, said the concern is that Congress could "play chicken" with the debt ceiling, which will become an issue just before the Fed's Dec. 15-16 meeting. Dan Clifton, political strategist with Strategas, said it now appears that a temporary budget will be approved this week, since Speaker of the House John Boehner said he would resign. But it will come back up again on Dec. 11. Republicans want the funding for Planned Parenthood removed from the budget. "If Boehner wasn't retiring, he'd have a hard time passing a budget going against what Republicans believe," he said. "Since he's retiring, he can shove this through with 30 Republicans, and the Democrats are going to provide the bulk of the votes to do that. That only buys three months and then it's somebody else's problem." Read More Dudley: Fed will likely raise rates this year Clifton said House Majority Leader Kevin McCarthy, Republican of California, is the most likely successor to Boehner. There are two paths the budget issue could take, and both would affect the Fed. "Do you have the 2011 debt ceiling fight and it creates problems for the financial markets? If you have that, it's hard for the Fed to act," he said. Clifton said the other scenario is that the budget battle and debt ceiling fight could also get straightened out over the next three months, and the Fed could then have the confidence to raise rates. "We solved one problem, and we created a larger problem. We've got to deal with the debt ceiling and the Fed is going to try to raise rates," Clifton said. Clifton said the Republicans would need to replace McCarthy as majority leader if he replaces Beohner. "It's all very fluid," he said. If a conservative is named to replace him, the divide within the GOP could widen. "They feel empowered now. Just by getting Boehner and [Eric] Cantor out last year. And they're pushing to get McConnell out in the Senate," he said.

Janet Yellen

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Fed officials are lining up behind a rate hike this year, but odds are rising that Congress could get in its way.

New York Fed President William Dudley said Monday that the Fed will likely raise rates this year, just days after Fed Chair Janet Yellen said the same thing and noted that she personally was behind it.

The list of obstacles is already long, with fears of slowing global growth because of China at the top.