Yesterday’s testimony to the Senate Banking Committee by Federal Open Markets Chair Janet Yellen sparked a significant market reaction, with yields on Treasuries, eurodollar futures and Fed Funds futures falling, while the USD took a hit and stocks rallied.  Our interpretation of the Chair’s testimony was significantly less dovish, and based on both that testimony, recent FOMC statements, and messages sent through media interviews or public statements by other FOMC members, we constructed the following flow chart predicting a path forward for rate hikes, if they are to take place this year.

Path forward for rate hikes

As shown, it’s very much possible that the Fed hikes in June; nothing we have heard from the Chair or other members of the FOMC rules that out.  But in our view, a June hike requires that data – especially jobs growth – must continue on trend consistently until June, and furthermore the term “patience” in reference to policy accommodation has to come out of the FOMC statement before a hike, as explicitly stated by the Chair yesterday.

Our chart isn’t designed to capture every possible scenario, or assign probabilities to each.  Instead, we think the chart helps illustrate the extremely conditional nature of Fed tightening, and how this creates a large number of scenarios and decision points for the FOMC over the coming six months.  If you’d like access to the full report we excerpted this chart from, please use our contact form to request it now.

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