Fed Hikes With One Dissent: Fed Behind the Curve?

Mike Shedlock
|
Posted: Mar 16, 2017 12:01 AM
Fed Hikes With One Dissent: Fed Behind the Curve?

As expected, the Fed hiked interest rates 25 basis points to a range of 3/4 to 1 percent. Minneapolis Fed president Neel Kashkari dissented. Kashkari voted to hold rates steady.

Here are snips from the FOMC March 15 Statement.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

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.

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.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Gundlach Says Bond Market Set to Rally as Fed Raises Rates

There is nothing extraordinary in this report. Everything is as expected.

Bloomberg reports Gundlach Says Bond Market Set to Rally as Fed Raises Rates.

The bond market is poised for a short-term rally as the Federal Reserve enters a series of interest rate hikes that will moderate inflation, Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital, said on CNBC.

“I think the bond market is set up for a rally coming up in the weeks ahead,” Gundlach said.

Yields on 10-year Treasuries are likely to head back down as inflation moderates later this year, Gundlach said.

“With that movement, that supports a bond market rally,” he said.

Yield Curve Discussion

If the Fed keeps hiking, the short end of the curve will get clobbered. The long end of the curve is another matter.

I agree with Gundlach that inflation, as measured by the CPI, will slow. Much of the CPI rise year-over-year is against very low comparisons, led by a rise in energy. Energy prices have stalled, if not reversed.

The economic reports have not been as strong as they look. For discussion, please see:

  1. Retail Sales Rise 0.1% in February, January Revised Higher, Auto Sales Decline: Spotlight on Weather and Seasonal Adjustments
  2. Crude Dips Below $48.00 First Time Since November 29: CPI Where to From Here?

I expect the yield curve to flatten with short-term yields rising and long-term yields declining. If the Fed keeps hiking, the curve will invert.