As universally expected, the Fed did not hike rates at the May meeting. Instead, the FOMC committee issued a boilerplate Press Release that the first quarter slowdown is transitory and that inflation expectations are balanced.
The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
June Rate Hike Expectations Up Again
Bond Market Reaction
- The yield on the 2-year and 5-year treasury notes rose a relatively sharp four basis points.
- The yield on the 10-year treasury rose 2 basis points.
- The yield on the 30-year long bond fell 2 basis points.
This action, if it holds, is indicative of a bond market that sees the Fed hiking the US into recession.
- April 5: Don’t Worry Weakness is Transitory: Fed Expects a Second Quarter Rebound, Higher Equity Prices
- May 2: Auto Sales Puke Again: Year-Over-Year Totals: GM -6%, Ford -7.2%, Toyota -4.4%, Fiat-Chrysler -7.0%
- May 1: Consumer Spending Flat, PCE Inflation Weakest Showing In 16 Years, Rate Hike Odds Rising
Mike “Mish” Shedlock
The only thing that matters is the market odds for rate hike. That went through the roof. Now comes the yapping by the fed heads. If the odds hold rate hike is a given.
If jobs report good tomorrow and in June, I expect a hike
Tony Bennett said:
Janet Doth Protest Too Much
She’s seems heck bent to raise … no matter what … quickly.
Obviously, the Federal Reserve is privy to a lot of inside Wall Street info that will never see the light of day.
Is the light at the end of the tunnel an oncoming recession and FR scurrying for ammo?
” is privy to a lot of inside Wall Street info ”
Just curious, what type of ‘important’ info would you think there is that is not publicly disclosed?
Tony Bennett said:
The Federal Reserve (and Treasury Department) have revolving doors with Wall Street.
The repeal of FASB 157 in March of 2009 allowed banks to switch from mark to market to mark to model. Many assets held on Wall Street are Level 2 / Level 3 (hello, derivatives) where there is no active market … so Wall Street can get away with modeling everything is A – OK on their financials.
The insiders will know the true score. And they know Treasury Dept and Federal Reserve are their friends (literally).
Would be great to see them raise rates into a slowing economy. Everything is transitory to the Fed, even blood flow.
Jarhead John said:
All eyes on the ten year note….should the Fed raise again and the ten year drop to levels seen in July 2016 we will essentially have a flat yield curve….recession anyone?
Truth seeker said:
Yes two strong payroll reports the Fed will hike. How desperate r they to hike? Does the ends justify the means? Back in the 2012 presidential race the New York Post made the accusation that the employment numbers were falsified to help Obama right before the election . Then Jack Welch confirmed this report in the WSJ.I don’t if all that is really true r not, r would the Fed really stoop to this level? Then in July they could adjust the number with a revision.
Not only that, the Fed can make up for a lack of hike this time by a double hike when hiking next time. So, instead of two 1/4 point hikes, 1/2 point hike next time. Two-fer hikes. No doubt Fed will find a statistical window to their liking for propaganda purposes, or perhaps with the accustomed USA.gov fiscal stimulus not in the cards the Fed will find itself trapped “temporarily” until decade’s end.
And the stock market rllied to finish well of its lows of the day as well.
It looks like both the bond and stock markets are forecasting a VERY abbreviated, at-the-last-minute tightening cycle here.
If geniuses at the Fed think their rush to hike into a weakening economy will be enough to let air out of the enormous stock market bubble they have inflated, they are apparently mistaken.
Obviously the US is in for a slow rest of the year, recently the money supply has perked up a bit, we wait to see if narrow money growth perks up further to see if this is just a temporary slowdown or something worse.
I have a few questions to ask here…
The way Steve Mnuchin is talking about 50-year bonds, is the Fed likely to reduce its balance sheet by first stopping reinvestment of Treasury as it comes due and the Treasury issuing 50-year bonds of like amount. Since the Fed balance sheet has about $2.5 trillion in Treasuries, does it imply an issue of 50 year bonds (and who knows 100 year bonds also) of like amount as the bond matures? If so how would the issuance pan out and would its (50 year bonds) roll out be a smooth affair? My reading is if there is appetite for the bonds it might turn out to be non-event. What is the likely effect of this running off on the bond and stock market? IMO, no disruption in the bond market and stock market can run up as it frees the Fed to do more QE should there be a recession. Also is that what Bernanke was hinting when he said he expects the Fed balance sheet could be around half its present size? What happens to the MBS on the balance sheet?
Risk is increasing. Wouldn’t natural interest rates be rising in such an environment?
I’m not giving the Fed any credit. Their backward notions just happen to accidentally match the actual market movements this time. Over the past 20-25 years the Fed has purposely tried to do the exact opposite of what the market signals. The Fed looks at fudged, lagging indicators and fools itself into thinking they have a crystal ball when they are actually looking at dead sea scrolls.
In other words, the Fed rejects market reality and substitutes its own. An astrologer would do a better job – the position of the planets and stars is solid, valid data and the mathematical models of their movements are actually proven accurate.
Ben Franklin said:
QE4, on the way. Keep raising until you have to cut again. Heard Ben Bernanke over the weekend say as much.