In mid June, there was a startling change in the words issued from the Fed. After a half-year of chatter suggesting all is well, the news came that there would once again be no rise in the target rate in the Federal Funds market. Since the top of the year, and despite the rhetoric, we’ve been skeptical that the Fed would follow through with any additional rate hikes in 2016. Our own Chuck Butler has repeatedly and correctly suggested this over in the Daily Pfennig® blog. So, were the Fed’s April and May speeches overdoing it a bit? "The lady doth protest too much, methinks." But who really knows what the future may hold at this point?
Speaking of soothsaying and the future, one of the best things that Chairwoman Yellen admitted during the debriefing was that the long-term outlook is “highly uncertain.” It was an open and honest response, perhaps the most valid of the day, to questions about where the economy is headed. And while the Fed still seems to maintain its belief in the “fatal conceit” of setting rates, it’s good to know that they are as uncertain as the rest of the market about what will happen if they do.
Central banks around the world openly state an objective to create a higher inflation rate of around 2%. I’m unaware of the magic behind this number, but here on the trading desk it stirs up just as much controversy as college football rankings. Chris Gaffney, President of EverBank World Markets, believes that Chairwoman Yellen may be more willing to risk a rapid rise in inflation past the 2% target rather than be known for forcing a slowdown or, even worse, a recession or depression.
One of the more interesting topics swirling about is the concept of Fed credibility. Some Fed members and many commentators suggest that if there is no target rate hike this year, people will begin to question the Fed’s competencies. As for me, I would only question the Fed’s credibility should they hike rates as a means of fulfilling a verbal commitment to do so.
Today, I am more inclined to observe the “invisible hand” of the market than listen to economists. And, right now, it’s saying that economic activity will remain slow and inflation low over the next 10 years. This position is strongly supported by the 1.48% yield (as of 6/29/16) on the U.S. 10 Year Treasury Note, which stood at around 2.36% this time last year and appeared to be initiating the take off roll for a vibrant U.S. economy. Times, they certainly do change.