Last week was interesting, to say the least.
It was highlighted by a Federal Open Market Committee (FOMC) meeting, more White House shake-ups, a budget deal, and more tariffs.
Along with all that, the Dent Research team met in snowy Baltimore for brainstorming sessions.
I was a bit distracted during Wednesday’s meetings because rates were moving higher ahead of the FOMC meeting. The markets were expecting a rate hike, so yields crept up ahead of the 2 p.m. (EST) decision.
The Fed hiked the federal funds rate target range by a quarter-point, as expected, from 1.5% to 1.75%. It also released updated forecasts.
The Fed now expects the economy, as measured by GDP, to grow at an annual rate of 2.7% during 2018, up from a prior forecast of 2.5%. GDP growth in 2019 will be 2.4%, up from a previous estimate of 2.1%. Job gains are expected to push the unemployment rate down to 3.8% this year and 3.6% in 2019 and 2020.
Core consumer inflation, as measured by the PCE index, is expected to hit 1.9% this year and 2.1% next year and into 2020.
The Fed still expects to hike rates two more times this year, three times next year, and a couple more times in 2020. Balance sheet reductions will total $20 billion this month and $30 billion next month. So no change in that plan.
At first glance, the Fed statement appeared hawkish, or even aggressive, in its forecast and planned rate hikes. The market initially sold off Treasury bonds, sending yields higher. But when new Fed Chair Jerome Powell took to the podium to recap the written statement and to answer questions from the press in record time, the markets weren’t so impressed.
I bolded and italicized my summary of the Fed’s inflation expectations because that’s the part that confused the markets. With a growing economy and further gains in the jobs market, how is it that inflation is barely moving higher?
The new Fed chair didn’t or couldn’t explain, and maybe there’s still confusion as to why.
Treasury yields started to drop again, and with Thursday and Friday’s sharp selloff in the stock markets, yields dropped even more. Money flooded back into safer Treasury bonds as stocks were sold.
Take a look at the chart below:
The long-term Treasury yields made an intra-day high of 3.15% on Wednesday, just after the hike. But once Powell’s press conference ended, they started dropping. Yields sit at 3.07% early Wednesday mornrning.
I’m actually surprised yields didn’t move even lower since the two-day drop in the Dow Jones Industrials was more than 1,000 points. In any case, we could see yields start to move higher into Thursday’s inflation data.
The Fed’s preferred consumer inflation gauge will be out Thursday mornrning. Along with February personal income and outlays, the personal consumption expenditure (PCE) price index will be released.
The core PCE price index, which excludes food and gas, has been running at 1.5% on the year, which is well below the Fed target of 2%. If we see inflation ticking higher here, yields will likely move higher.
That’s good for me and my readers, since we profit from surprises in the financial markets, and specifically in the Treasury bond market, with Treasury Profits Accelerator.