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UPDATE 1-Fed policymaker adds grist to March U.S. rate hike view
March 1, 2017 / 9:21 PM / in 9 months

UPDATE 1-Fed policymaker adds grist to March U.S. rate hike view

(Adds comment, context, analyst comment)

By Lisa Maria Garza and Jonathan Spicer

DALLAS/NEW YORK, March 1 (Reuters) - The Federal Reserve is setting the stage for a U.S. interest-rate increase later this month, with another policymaker Wednesday making the case that economic strength at home and stability abroad have created a window for action.

“I believe the economy is strong enough that we can manage it,” Dallas Fed President Robert Kaplan, a voting member this year on the Fed’s policy committee, said on Wednesday. “We should begin the process sooner so we can ensure that it is gradual and patient.”

The comments were the latest in a period with an unusually high concentration of Fed speeches, with four out of five Federal Reserve Governors - including Chair Janet Yellen - speaking this week ahead of the March 14-15 rate meeting. New internal Fed rules on public communications make Friday the last chance to set up market expectations before the next Fed meeting.

In what appears to be a coordinated message, several Fed speakers so far this week have already succeeded in boosting the market pricing of a March hike to 70 percent from 20 percent last week.

Kaplan’s comments came after New York Fed President William Dudley said on Tuesday that the case for a rate hike has become “a lot more compelling” and by San Francisco Fed President John Williams, who on the same day said he sees no reason to delay raising rates.

The message, along with data showing stronger inflation and manufacturing activity, has bolstered bets that the Fed will in two weeks make the first of the three rate rises it expects this year. The messaging appears to have worked in aligning financial markets with the Fed.

That has not happened in past years. Policymaker forecasts after the Fed’s December 2015 rate hike pointed to four more rate hikes in 2016. The Fed managed just one.

What is different this year is that traders are actually falling into line with the March rate-hike view and the Fed’s current forecast for three rate hikes this year.

“If there was a desire to walk it back, I don’t think that Dudley would have been so pointed,” said Peter Hooper, former Fed economist who is now chief U.S. economist at Deutsche Bank Securities. “Now they are deciding that maybe things are in place to actually move in March.”

WAITING FOR TRUMP

The U.S. central bank left rates unchanged at its January meeting, and had not been expected to move again until May or June in part because so little is known about U.S. President Donald Trump’s fiscal plans.

But several Fed officials now say further policy tightening is appropriate regardless of any potential fiscal boost, as inflation edges higher and the economy nears the Fed’s goal of full employment. Raising rates in March gives the Fed room to deliver more rate hikes should Trump’s policy bolster growth, or to pause should they slow the economy or if this year’s European elections unsettle markets.

The shift in tone reverberated. Stocks touched new record highs on Wednesday as talk of a pending rate hike overshadowed Trump’s address to Congress on Tuesday night. The cost for banks to borrow funds surged by the most since December 2015, when the Fed lifted rates from near zero.

Just how strongly the Fed means to signal a March rate hike may become clear after Fed Governor Lael Brainard, one of the central bank’s most dovish members, speaks late on Wednesday. Several other policymakers are due to speak on Thursday and Friday, including Yellen.

“I think Yellen probably still would prefer to be cautious, but it is becoming hard for her to corral the growing number of FOMC members who prefer to move when, like now, there is a clear opportunity,” wrote Cornerstone Macro’s Roberto Perli.

Prattle, a firm that analyzes Fed speeches, said Wednesday that it would see a clear signal for a March rate hike only if all upcoming Fed speakers tilt hawkish. (Reporting by Lisa Maria Garza; reporting by Ann Saphir; Editing by Chizu Nomiyama)

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