Expectations about the Federal Reserve’s plans for raising interest rates changed rapidly Tuesday, as investors heard suggestions from central bank officials that they might be looking to tighten monetary policy faster than previously thought.
Bond market odds suggested Tuesday evening that investors saw more than a 60 percent chance that the Fed would raise its interest rate target at its next meeting in March. That was a swing of more than 30 percentage points from the day before. U.S. bond rates also rose sharply in reaction to the news.
The most significant comments of the day came from Federal Reserve Bank of New York president William Dudley, who is the vice chairman of the central bank’s monetary policy-setting committee and a permanent voting member.
In a late afternoon interview on CNN International, Dudley said that the “case for monetary policy tightening has become a lot more compelling” since Fed officials’ two-day meeting at the end of January and beginning of February.
Citing signs of economic growth, job gains, and rising inflation, Dudley said that “we’re very much on the trajectory that we thought we would be on, and we said if we’re on that trajectory we’re going to gradually remove accommodation.”
Currently, the Fed targets short-term interest rates of 0.5 percent to 0.75 percent.
In their most recent projections, Fed officials projected that they would raise interest rates by a quarter-percentage point three times in 2017, bringing the target to between 1.25 percent and 1.5 percent.
Two other regional Fed presidents, John Williams of San Francisco and Patrick Harker of Philadelphia, also gave comments Tuesday suggesting that a March rate hike might be on the table.
The overnight rates targeted by the Fed influence rates on credit products throughout the economy, including business loans, mortgages and credit cards. Raising rates is thought to slow spending, staving off high inflation.
One factor swaying Fed officials toward raising rates faster has been the stock market run that followed President Trump’s election, commonly attributed to expectations of tax cuts and bank deregulation.
Speaking Tuesday, Dudley suggested that the 3 percent to 4 percent economic growth targeted by Trump, which many economists say is out of reach because of slow U.S. population growth, would be plausible in the scenario of a productivity boom similar to the late 1990s.
