Since the Federal Reserve hiked rates in December, both the European Central Bank and the Bank of Japan have eased policy further. The idea that because they cut rates means that the Fed cannot raise rates is a not a particularly helpful way to think about that is happening.  

The market attributes practically no chance for a Fed hike today. But the FOMC is expected not to back off very much from its view that contrary to what some have argued, the December rate hike was not a mistake, and that the economy is still on track to allow the Fed to hike rates this year.  

The four hikes seen in the dot plots in December will be reduced. Many expect only two hikes, but we suspect the Fed will retain three. And to be sure, it is not simply that the Fed is reassessing, the market has as well. Consider that since February 11, the implied yield of the June Fed funds futures has risen from 34 bp to 49 bp.   

This is nearly completely discounting a June hike. Assume first 15 days of June Fed funds averages 36 bp, the Fed hikes on June 15 and Fed funds averages 62 bp for remaining 16 days of the June or ((15*36) + (16*62)/31).  

The implied yield on the December Fed funds futures contract has doubled since Feb 11. It has risen from a low of 34 bp to 69 bp presently. This is to say the pendulum of market expectations have swung from doubting even one hike to pricing the risk of two.  

The Fed’s leadership is likely growing more confident. The labor market has continued to absorb slack. Despite the dollar’s rise and the fall in energy prices, core inflation (CPI and core PCE deflator) rose last year. The core PCE deflator stands at 1.7%, drawing closer to the Fed’s 2.0% target. Market-based measures of inflation expectation have risen back to levels since before the December rate hike.  

Global capital markets have stabilized after the rough first six weeks of the year. Retail sales, which account for about 40% of personal consumption expenditures, disappointed yesterday (and the January series was revised lower), the economy appears to be growing near trend in Q1 after the slowdown in Q4 15.