Dallas Fed President Hints at Three Rate Hikes This Year

by Ben Pena February 24, 2018, 4:55
Dallas Fed President Hints at Three Rate Hikes This Year

Despite Fed's hawkish views, bets on the US short-term interest rate futures continued to reflect expectations of three rate hikes this year, based on a Reuters analysis.

The new chairman of the Federal Reserve may be wondering if the bumpy ride that has marked the first weeks of his tenure will continue throughout his term of office.

Benchmark 10-year notes last rose 5/32 in price to yield 2.9225 per cent, from 2.941 per cent late on Wednesday.

I expect the market to move lower here to test its recent lows and pressure new Fed chairman Jerome Powell - which will make his first appearance before Congress in his current role on February 28 - to walk back what looks like increasing hawkishness from the central bank. "This suggests to me that it may be appropriate later this year to begin an assessment of our current monetary policy framework and alternatives".

She noted that such reviews take time and should be thorough. As business adviser Irwin Stelzer commented: "Almost coincident with a jobs report that showed the economy to be strong and wages rising, the Fed perceptively announced that the economy was strong and wages were rising".

"It may be appropriate later this year to begin an assessment of our current monetary policy framework and alternatives", Mester said in prepared remarks to a conference of central bankers and economists in NY.

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With the notably decrease on the day, the ten-year yield pulled back further off the four-year closing high set on Wednesday.

The Fed's key policy rate is now in a range of 1.25 percent to 1.5 percent. The Fed had pushed the rate to a record low near zero in December 2008 as it struggled to contain a severe financial crisis and the deepest economic downturn since the Great Recession of the 1930s.

Hardly revelatory, yet it caused investors to wonder whether the three upcoming rate hikes they'd pencilled-in for this year might turn out to actually be four, even five. The catalyst for the sell-off into the close was a surge in interest rates to fresh multiyear highs in a delayed reaction to the Fed minutes.

Worries of rising inflation were at the heart of a stock market rout earlier this month.

"Right now Fed fund futures are pricing in three rate hikes with just under a 50-50 short of a fourth", said Matt Miskin, market strategist at John Hancock Investments. He said he is looking for clues if the stricter bank underwriting standards and higher commercial interest rates have helped curb market volatility, but so far he hasn't seen any. Yellen presided at the January meeting, which occurred before the market turmoil, and the Fed left rates unchanged. Mester has previously discussed possible changes to the US central bank's inflation-targeting regime in a similar speech in January but has not endorsed any one alternative.

Powell's testimony arrives ahead of the Fed's key monetary-policy convention next month, but after a release of minutes for January on Wednesday rattled investors, already fretting about inflation and bond yields drifting higher.

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