Fed hike odds climb after data

The combination of Trump's 'phenomenal' tax plan, Yellen's slightly hawkish talk and good economic data today has pushed the implied probability of a March hike to 44% from 30% ten days ago.

For May, the odds are now up to 61.4% from 43.5% a month ago.

Economists at Goldman Sachs think the market is moving in the right direction but might be getting ahead of itself for March but thinks the June probability is higher than the market thinks.

"Core CPI inflation was well above consensus expectations at +0.31% in January, accelerating to +2.3% on a year-over-year basis. We estimate that the CPI and PPI reports imply an increase of +0.33% (mom) in core PCE inflation, or 1.8% from a year earlier, to be reported on March 1st. As a result, we have revised up our subjective odds of a rate increase at the March FOMC meeting to 30% (from 20%), and now see it as a close call whether the committee raises rates over the next two meetings or waits until mid-year (more details below). Separately, retail sales increased by more than expected in January and earlier months were revised up.

Based on today's stronger-than-expected data--especially the CPI report's likely implications for January core PCE inflation--we are revising up our subjective probability that the next move in the federal funds rate will be a hike at the March FOMC meeting to 30% from 20% previously. We are holding our probability for a hike at the May meeting unchanged at 20%, and lowering our probability that the next hike will come at the June meeting to 40% from 45%. In short, we now think it is a close call whether the committee will hike the funds rate at the next two meetings or wait until June, and we see very high odds (90%) of at least one rate increase by mid-year."