January’s stronger-than-expected employment report, which was released on February 6, refocused fixed-income investors on the rising odds of a first Fed rate hike at the June 16-17 meeting of the FOMC. The 10-year Treasury bond yield is up from 1.83% on February 5 to 2.14% on Tuesday of this week. Yesterday’s release of the January 27-28 FOMC minutes, which was relatively dovish, eased the yield back down to 2.08%.
Of course, the meeting occurred before the release of February’s strong employment data. In addition, economic indicators out of Germany and Japan showed some improvement since the meeting. The price of oil has also rebounded in recent weeks. Several members of the FOMC have subsequently said that they would favor a mid-year rate hike.
The implied federal funds rate based on futures contracts traded on the CME rose sharply following January’s employment report. The 12-month contract jumped from 0.52% on February 5 to 0.66% currently. The six-month implied fed funds rate is 0.25%.
These forecasts are consistent with our one-and-done scenario for Fed rate hikes this year. So are the latest relatively dovish minutes. Here are a few key excerpts:
Of course, the meeting occurred before the release of February’s strong employment data. In addition, economic indicators out of Germany and Japan showed some improvement since the meeting. The price of oil has also rebounded in recent weeks. Several members of the FOMC have subsequently said that they would favor a mid-year rate hike.
The implied federal funds rate based on futures contracts traded on the CME rose sharply following January’s employment report. The 12-month contract jumped from 0.52% on February 5 to 0.66% currently. The six-month implied fed funds rate is 0.25%.
These forecasts are consistent with our one-and-done scenario for Fed rate hikes this year. So are the latest relatively dovish minutes. Here are a few key excerpts:
(1) Many participants indicated that their assessment of the balance of risks associated with the timing of the beginning of policy normalization had inclined them toward keeping the federal funds rate at its effective lower bound for a longer time.
(2) There was wide agreement that it would be difficult to specify in advance an exhaustive list of economic indicators and the values that these indicators would need to take. Nonetheless, a number of participants suggested that they would need to see further improvement in labor market conditions and data pointing to continued growth in real activity at a pace sufficient to support additional labor market gains before beginning policy normalization.
(3) A number of participants emphasized that they would need to see either an increase in market-based measures of inflation compensation or evidence that continued low readings on these measures did not constitute grounds for concern.
(4) Several participants indicated that signs of improvements in labor compensation would be an important signal, while a few others deemphasized the value of labor compensation data for judging incipient inflation pressures in light of the loose short-run empirical connection between wage and price inflation.
(2) There was wide agreement that it would be difficult to specify in advance an exhaustive list of economic indicators and the values that these indicators would need to take. Nonetheless, a number of participants suggested that they would need to see further improvement in labor market conditions and data pointing to continued growth in real activity at a pace sufficient to support additional labor market gains before beginning policy normalization.
(3) A number of participants emphasized that they would need to see either an increase in market-based measures of inflation compensation or evidence that continued low readings on these measures did not constitute grounds for concern.
(4) Several participants indicated that signs of improvements in labor compensation would be an important signal, while a few others deemphasized the value of labor compensation data for judging incipient inflation pressures in light of the loose short-run empirical connection between wage and price inflation.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.