June Is the Call, September If Q1 Falters

03/09/2015 04:08 pm ET | Updated May 07, 2015

Did Federal Reserve board Chairman Janet Yellen reveal anything last week during her Congressional testimony? Did the economic numbers or congressional questioning alter the Fed trajectory for tightening? Is all the discussion regarding what the Fed will do useless naval gazing as the Fed has already indicated what they are likely to do that only some extraordinary economic or political event would likely alter?

The answers to these questions are no, no and probably yes.

Yellen had already pledged that the Fed would not tighten after the first two meetings of 2015. She also already indicated that the change of language regarding keeping rates low for long-term in to the Fed will exhibit patience--likely to come at the March meeting -- would not immediately signal a tightening. This takes April out of the equation.

The Federal Reserve has been on a steady path to a mid-2015 tightening for quite some time. And if that is the case June--the first FOMC meeting where a tightening is in play that is accompanied by a Janet Yellen press conference--is a strong target. While the September meeting (or later) is more likely based on the pricing of Fed Funds futures, it takes us out of mid-year outlook and there has been no U.S. economic news to further delay. Mid-2015 also matches Yellen's "six months after the end of tapering" comment from her first press conference.

The Fed Fund futures portray an extremely cautious Fed that would wait until September or later, with a less than 50/50 chance of a second move by yearend. Seems too cautious seeing that we have been stuck on zero for six years (see chart). Are we really going through all this hand wringing for one 25 basis point move for the entire year?

One reason to believe it may be more cautious is that once on a policy path, the Fed will not want to alter it. The Fed telegraphed in 2013 that it would begin tapering from open ended quantitative easing (QE3) by yearend. The market priced in the beginning of tapering at the September 2013 FOMC meeting but poor economic numbers and a dysfunctional Congressional budget process pushed it out to December. Strong numbers going into that December meeting left the Fed with no more excuses. Once initiated, the Fed continued on a steady tapering path despite some extremely weak economic numbers in the first quarter of 2014. Many analysts assumed the Fed would skip a meeting but they did not.

In Futures January bond outlook, our analysts anticipated the Fed would tighten only a quarter and only at every other meeting once initiated. Given how they executed the taper, it would be more likely for them to delay tightening a meeting or two, than alter its path once initiated. Our analysts also expected the Fed to maintain a range rather than a hard number meaning the first move will take the Fed Funds rate up to between 25-50 basis points. That would suggest the Fed tighten 25 bps at its June, September and December meeting pushing the Fed funds rate to between 75 and 100 basis points by yearend. Of course they could hold off to September and just tighten in September and December, assuming they would coordinate a move with a scheduled press conference.

This seems likely, and barring major economic news there is no reason to believe that every single date point has the capability of altering this trajectory.

As always, the Fed's decision is data dependent but given their approach to tapering, a trajectory has already been set and it will take a significant miss to alter it.