Many market participants are convinced the Fed will not hike rates in March, given how much stocks and oil prices have fallen. However, other evidence, including economic evidence, so far keeps a rate hike in play:
1. Atlanta Fed Model is now projecting 2.7% (q/q, saar) for Q116 Real GDP Growth -- an above-trend pace.
2. An above-trend pace is evident in the decline in the January Unemployment Rate.
3. Cleveland Fed President Mester -- a hawk -- does not look as if she has changed her view of the appropriateness of a gradual raising of the funds rate, in a nicely laid-out speech yesterday (see the Cleveland Fed website).
To be sure, the current market weakness risks slowing economic growth ahead, either through wealth effects or possibly through bank lending practices, as Yellen acknowledged in her testimony in the past couple of days. The Fed's Senior Loan Officer Survey, for example, shows some tightening in lending standards in Q415. But, these effects take time to show up in real-side economic data. So, their influence on Fed policy may be more in play later this year.
However, the markets could react more benignly to a March hike if the economy continues to look relatively strong by the time the FOMC meets. In this case, the drag from the recent market drops would be mitigated -- and the Fed could stay the course in hiking 4 times this year.
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