What's Behind the Fed's Inflation Obsession?

George Yacik - INO.com Contributor - Fed & Interest Rates


The battle lines are being drawn for the Federal Reserve’s monetary policy meeting this week. The prevailing market consensus right now is that no resolution of the debate – which mainly concerns inflation – will happen at the meeting, meaning there will be no change in interest rates, and may not be before the end of this year.

One side of the issue, which seems to be the prevailing view at the central bank, was recently promulgated by Fed governor Lael Brainard at a meeting of the Economic Club of New York. “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” she said. “We have been falling short of our inflation objective not just in the past year, but over a longer period as well. What is troubling is five straight years in which inflation fell short of our target despite a sharp improvement in resource utilization.”

The other side, which appears to be the minority opinion, is represented by William Dudley, the president of the New York Fed, who isn’t overly concerned about the current level of inflation. “Even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate” to raise interest rates soon, he said recently. “I expect that we will continue to gradually remove monetary policy accommodation.” Continue reading "What's Behind the Fed's Inflation Obsession?"

Janet From Another Planet

George Yacik - INO.com Contributor - Fed & Interest Rates


For most of the past 10 years the financial markets have been led if not actually directed by the all-knowing, all-seeing Federal Reserve. But over the past year or so the roles have changed, or at least the markets have basically stopped listening to the Fed.

Case in point: Last week the Fed, largely as expected, voted 8-to-1 to raise short-term interest rates by another 25 basis points; Minneapolis Fed President Neel Kashkari, who wanted to keep rates unchanged, was the lone dissenter. The Fed has now raised its benchmark federal funds rate three times since last December.

Normally, that move should have induced long-term rates – which are set by traders and investors in the bond market, not the Fed – to rise, too. But that hasn’t happened. In fact, long-term rates have gone in the other direction, falling to their lowest levels since last November, to the point where the yield curve – the difference between short-term and long-term rates – has flattened out to a point we haven’t seen in years.

Last week the yield on the U.S. Treasury’s benchmark 10-year note ended at 2.15%, which is down nearly 50 basis points from a recent high of 2.63% three months ago. Over that same period, the yield on the three-month T-bill has risen by about 25 bps, from 0.75% to 1.01%. That means the difference between the two has been cut to about 115 bps from 188 bps in just three months.

Why the disconnect between what the Fed is doing, and thinks is happening, and what the bond market perceives is really happening? Continue reading "Janet From Another Planet"

The Odds Of A Fed Rate Hike In June Just Got Smaller

George Yacik - INO.com Contributor - Fed & Interest Rates


Still think the Federal Reserve will raise interest rates at its monetary policy meeting next week? Last Friday’s jobs report for May should make you rethink that notion. But it’s not the only reason.

Prior to the release of the report – which showed that the economy added just 138,000 jobs last month, nearly 50,000 below expectations, while the previous two months were revised downward by 66,000– the market consensus called for the Fed to raise rates by 25 basis points at its June 13-14 meeting. That doesn’t seem like such a sure thing anymore.

After its last meeting on May 2-3, when it took no action on rates largely because of a weaker-than-expected economy in the first quarter, the Fed said it expected the slowdown was “likely to be transitory.” Now, however, we have a pretty substantial body of evidence that indicate fairly strongly, if not consistently, that the slowdown has continued well into the second quarter. Continue reading "The Odds Of A Fed Rate Hike In June Just Got Smaller"

Did The Fed Jump The Gun? Now What?

George Yacik - INO.com Contributor - Fed & Interest Rates


Based on the recent direction of the U.S. economy and the drop in Treasury bond yields to six-month lows, it would appear that the Federal Reserve may have been a little too hasty in raising interest rates and ending monetary accommodation. So how will the markets – both stocks and bonds – react if the Fed has to swallow its pride and need to stuff the genie back in the bottle?

As we know, since Donald Trump was elected last November, the Fed has raised the federal funds rate twice, plus promised at least two more increases by the end of this year. At the same time, it’s also said that it plans to start trimming its massive $4.5 trillion securities portfolio before year-end. All of that action has been predicated on the economy growing and potentially over-heating – i.e., causing too much inflation – under President Trump’s stimulative policies, including tax cuts, deregulation and repealing and replacing Obamacare.

But what happens if those assumptions don’t actually become a reality, which is what seems to be happening right now? Will the Fed suddenly start lowering interest rates again, or at least put off its plans for future rate increases? And will it also put on hold its balance sheet reduction plan? Continue reading "Did The Fed Jump The Gun? Now What?"

Snow Can't Dampen Brighter Employment News

George Yacik - INO.com Contributor - Fed & Interest Rates


The only thing standing in the way of an interest rate hike this week is the blizzard that’s supposed to hit the Northeast corridor on Tuesday, which might postpone the Federal Reserve meeting (unless they meet by conference call) but it only delays the inevitable.

If the verdict hadn’t been sealed already, it surely was after last Friday’s February jobs report. The Labor Department reported that nonfarm payrolls rose by 235,000, well above the consensus estimate of 200,000 and at the high end of individual forecasts. Labor also upwardly revised January’s figure to 238,000, making it the best back-to-back performance since last July. At the same time, the unemployment rate fell to 4.7% while the labor participation rate rose another tick to 63.0%. Wages grew 2.8% compared to a year earlier.

The report was actually the second strong jobs story of the week. ADP said private sector payrolls jumped by 298,000 last month, beating the consensus forecast by more than 100,000.

While I’m reluctant to give a president who’s been in office less than two months much credit for this showing, I think we have to give President Trump more than a few props for it. Despite the daily barrage of attacks, negative stories and fake news in the so-called mainstream press on Trump, unquestionably he has almost single-handedly changed the investment tone in this country since he was elected. First, it showed up in the stock market; now it’s starting to goose the employment numbers. Continue reading "Snow Can't Dampen Brighter Employment News"