The Ides of March Approach

George Yacik - Contributor - Fed & Interest Rates

In my previous post, I ended with the words, “Beware the Ides of March.” Well, if Janet Yellen and her friends on the Federal Reserve are to be believed, the Fed will raise interest rates on that day, and maybe several times after that later this year. Which leaves us with the uncomfortable thought of what happens to the bull market in stocks – and bonds, for that matter, too – that has been running virtually without interruption since the Fed dropped rates to zero back in 2008. Can the bulls continue to run without that prop?

If there were still any lingering doubts that the Fed would raise rates at its meeting next week, Yellen pretty much put those to rest in her speech in San Francisco last Friday. “At our meeting later this month, the [Fed’s monetary policy] committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said, adding that “the economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2% objective.” That speech followed similar comments from several other Fed officials during the week. Continue reading "The Ides of March Approach"

Why Doesn't The Bond Market Trust The Fed?

George Yacik - Contributor - Fed & Interest Rates

The minutes of the Federal Reserve’s January 31-February 1 meeting released last week said we can expect another interest rate increase “fairly soon,” which many people think means at the March 14-15 meeting, just two weeks away. But the bond market doesn’t seem to be buying it. Why not?

According to the minutes, “many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the committee’s maximum-employment and inflation objectives increased.”

At her Congressional testimony a week earlier, Fed Chair Janet Yellen was even more hawkish, warning that “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.” That doesn’t sound like someone who’s willing to wait until May, the Fed’s next monetary policy meeting after March (there’s no meeting in April). Continue reading "Why Doesn't The Bond Market Trust The Fed?"

Did The Markets Overreact - Again - To Yellen's Remarks?

George Yacik - Contributor - Fed & Interest Rates

You may not have noticed it, but before last Wednesday the bond market had been in kind of a mini-rally for the previous month. On Tuesday, the benchmark 10-year Treasury note fell to 2.32%, its lowest level since the end of November. That was down from 2.60% in mid-December, which also happened to be its highest mark since 2014.

But by the end of the week the yield on the 10-year had jumped back up to 2.47%, up 15 basis points in just three days. What happened to put the brakes so suddenly on this rally? Why, Janet Yellen spoke, and when Janet Yellen speaks – well, you know the rest.

But did anyone really listen? Continue reading "Did The Markets Overreact - Again - To Yellen's Remarks?"

Will There Be A November Surprise?

George Yacik - Contributor - Fed & Interest Rates

In its most recent Beige Book, covering late August through early October, released last week, the Federal Reserve noted that although economic “outlooks are positive, contacts in several sectors cite the upcoming presidential election as a source of near-term uncertainty, delaying some business decisions.”

The same could be said for the Fed itself. How much uncertainty has it created and business decisions has it delayed by its endless dawdling and indecisiveness on whether or not to raise interest rates? No matter who wins the vote, the election will end – maybe not on November 8, if it can be shown that someone did, in fact, rig the voting – but eventually, Donald Trump or Hillary Clinton will become president. But we have no such certitude that the Fed won’t continue to tease the markets about when it will start normalizing monetary policy. Continue reading "Will There Be A November Surprise?"

Is Data Dependency Dead At The Fed?

George Yacik - Contributor - Fed & Interest Rates

While it was certainly gratifying to know that the Federal Reserve may, finally, be ready to raise interest rates and normalize monetary policy before the end of the year, its reason for doing so, elucidated after last week’s FOMC meeting and Janet Yellen’s press conference left me shaking my head. To put it in economic terms, it didn’t make a whole lot of sense, given the Fed’s past behavior.

As we all know by now, the Fed, as widely expected, left interest rates unchanged last week, but hinted strongly for the umpteenth time that it’s almost ready to raise rates, just not right now.

“The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” the post-meeting announcement said.

Yet, at the same time, the Fed lowered its estimate for U.S. economic growth this year to 1.8% from its June forecast of 2.0%, which is also its new long-term view of the economy. That’s certainly justified by the reports we’ve been getting the last several weeks, which show the economy slowing, not gaining strength, in the second half.

So why would the Fed say that the case for raising rates had “strengthened” even as it downgraded its view of the economy and most recent reports back that up? Continue reading "Is Data Dependency Dead At The Fed?"