Will Trump cheer or jeer Yellen if Fed raises rates?

NY Fed president: 'Animal spirits have been unleashed'
NY Fed president: 'Animal spirits have been unleashed'

The market now thinks it's a given the Federal Reserve will raise interest rates at its next meeting on March 15.

But will expectations change if Friday's jobs report isn't as good as expected? And how will President Donald Trump, who bashed Fed chair Janet Yellen repeatedly on the campaign trail for keeping rates too low, react to any change in Fed policy?

According to Fed funds futures contracts on the Chicago Mercantile Exchange, investors believe there is a 91% chance of a rate hike. Expectations are for a quarter-point increase to a range of 0.75% to 1%.

Two weeks ago, there was less than a 20% chance of a rate hike. And the market was only pricing in about a 30% chance last week.

What's changed? New York Federal Reserve president William Dudley made the case for a rate hike in an interview with CNN's Richard Quest last week.

Related: NY Fed president said Americans are more confident about economy

Dudley referred to "animal spirits" that have been unleashed since the election.

In other words, the boost in sentiment among investors, businesses and consumers due to confidence about Trump's plans to lower taxes, reduce regulations and spend more on infrastructure may make it easier for the Fed to justify raising rates.

Dudley's comments were followed by a speech from Yellen on Friday in which she said a rate increase would probably be "appropriate" if more data point to an improving economy.

trump yellen fed

The most important data point is the upcoming jobs report for February, which is due out Friday morning.

Economists are predicting that about 185,000 to 190,000 jobs were added. That's solid, albeit slightly lower than the 227,000 added in January.

Nonetheless, a number roughly in line with forecasts -- or even slightly below -- would probably keep the Fed on track to raise rates.

"If Friday's number is good, I'd put my lunch money on the Fed raising rates next week," said Chris Bertelsen, chief investment officer of Aviance Capital Management.

Bertelsen joked he wasn't willing to bet the mortgage though. He said if the jobs report is "miserable" that might give the Fed pause.

Related: Yellen signals that a March rate hike is looking more likely

A bad jobs report would truly be a surprise, especially after figures from payroll processor ADP came out Wednesday morning that showed 298,000 jobs were added last month. That was vastly better than expected.

It's important to note though that the ADP figures don't include government jobs. And they aren't a perfect predictor of what the Labor Department reports.

But it's safe to say investors are now more optimistic.

"The market has been very strong," said Grant Bowers, a portfolio manager with Franklin Templeton. "We are seeing better economic data and conditions."

Bowers conceded the Fed may have to reconsider a rate hike if the jobs report is extremely weak. But he doubts that will be the case.

As for how President Trump will react to a Fed hike? Bowers thinks he should cheer it. After all, he complained when Yellen wasn't raising rates and accused her of doing so to try and boost the market for President Obama and Hillary Clinton.

"A rate increase should be viewed by the Trump administration as the market accepting his pro-business policies," Bowers said.

Deborah Cunningham, a portfolio manager with Federated Investors, also thinks a rate hike is all but certain. She argues that if the Fed doesn't raise them, it opens itself up more to political attacks.

Related: Fed economists criticize House GOP border tax

"If it stays pat for no apparent reason, the Fed will lose all credibility," Cunningham wrote in a report.

A rate hike next week would be the second since December and third since late 2015.

The rate increase in December 2015 was the Fed's first in more than nine years. The Fed cut rates to near zero in the midst of the 2008-2009 financial crisis.

So even if the Fed boosted rates several more times this year, Yellen (and Trump) probably won't have to worry too much about higher rates killing the economy.

Michael Arone, chief investment strategist at State Street Global Advisors, added that the market's version of March Madness (a play on the nickname of the NCAA basketball tournament) could keep the Fed from signaling that it will aggressively raise rates.

Arone noted that the looming deadline to raise the debt ceiling in Congress, the debate about how to replace Obamacare and upcoming Dutch elections this month could all create enough uncertainty that would lead the Fed to stay cautious.

There's also the issue of just who will be leading the Fed at this time next year.

The terms of both Yellen and Fed vice chair Stanley Fischer are due to end in 2018. It's not yet clear whether Trump will want them to stay on board or if he will appoint his own Fed leaders.

There is recent precedent for new presidents to stick with the status quo -- even when those Fed chiefs and presidents were not in the same party.

Related: Fed poised for major makeover in Trump era

Bill Clinton kept Reagan appointee Alan Greenspan. And Greenspan's successor Ben Bernanke, appointed by George W. Bush, served a second term as Fed chair under Obama before Yellen took over.

So it's possible Trump won't change anything at the Fed.

"Who knows what President Trump is going to do. But we are finally getting some pro-growth fiscal policies. That should enable the Fed to normalize rates. The Fed has been carrying the ball for the economy for so long," said Larry Rosenthal, president of Rosenthal Wealth Management Group.

But Yellen's future will probably depend on just how rapidly the Fed boosts rates and what impact it has on the economy and stock market.

"I don't think you are going to see the president or his crew become upset if rates are raised or not raised next week," Bowers said. "It might be a different story a year from now after three or four rate hikes."

Social Surge - What's Trending

Mortgage

Newsletter

CNNMoney Sponsors