General risk appetite took a turn for the worse yesterday after a couple of key comments from Fed members. Normally the market wouldn’t hinge on just some comments, but they came at the tail end of some worrying data. That helped give the dollar a boost.
The latest boost in the dollar came on top of comparable currencies getting some fundamental weakness. For example, the Euro was a little weaker after Greece’s ECB representative talked down the threat of inflation. And Japan has been drawing out the nomination of a new BOJ governor, suggesting that a swift shift away from ultra-easy policy likely wasn’t in the cards.
 What happened?
Bullard was the one who outright suggested that a 50bps hike could be in the cards for the next Fed meeting. He responded to a question about the possibility, and said it wasn’t ruled out. He’s not a voter this time around, and it’s not unusual for the Fed to plant certain ideas in the market through non-voters ahead of the meeting. This is another one of those, by itself, it doesn’t mean much. But taken into context, it added to what was said by Mester, which is more significant.
Mester wasn’t a voter last time but will rotate on to the FOMC for the next meeting. She said that she would have supported a 50bps hike at the last meeting when the Fed ultimately hiked by just 25bps. We don’t have the minutes yet to know how the opinions on a “double” hike break down. They will be coming out next Wednesday. But that might have been enough to incline the balance. And it implies that she will be more likely to support 50bps at the next meeting.
What did the market do?
The market and the Fed have long been in disagreement about just how high rates are going to go. The Fed insists that it will keep hiking and hold rates higher. The market generally hasn’t believed that and has been betting on rates topping out at a lower range than what the Fed is implying. Powell’s comments that there were only a couple more rate hikes coming led to cheers in the markets, but it still required accepting that rates might need to go up above 5.00%, the upper limit the market had been pricing in until then.
For now, the strong majority of economists are on the side of just a 25bps hike at the next FOMC meeting. But the amount of economists forecasting a 50bps hike nearly doubled to 18% after both Mester and Bullard’s comments. Several more Fed officials will be talking before the release of the FOMC minutes on Wednesday, and likely the topic of 50bps will come up again. At the very least, the possibility of a double hike has been planted in the conversation, and risk appetite is reacting accordingly.
Other factors pushing the narrative
US PPI also came in hotter than expected, suggesting that inflation isn’t fully under control. This came after CPI figures were in line, but the annual comparable was higher than expected. Additionally, the prior month’s CPI figure was adjusted higher.
Initial jobless claims also came slightly below expectations, reviving the notion that the labor market is not only healthy, but potentially too tight. Several Fed officials had been pointing to the labor market as being of concern, which could also raise bets for a larger hike in the March meeting.
