Whether we're referring to bond vigilantes trading treasuries or fed funds futures, these traders were prominently correct a year ago when the bottoming in the 10-2 year yield spread helped signal increased pressure by the Fed to act. But could they be wrong this time? Indeed, they were wrong in their longer term expectations such as in spring 2007 in pricing expectations for rates to remain steady 6 months out. Although futures have scaled down odds of a rate cut, they continue pricing nearly 50% odds of 25-bp hike by the September 16 meeting and as much as 75% odds of similar tightening by year-end. Such pricing is in our opinion flawed considering the history that the Fed had never raised rates before a considerable decline in the unemployment rate. And unemployment is far from being the only obstacle to a rate hike. Recall that the Fed continues to pump extra liquidity in the system through its Primary Dealer Credit Facility just to keep some form of normalcy in the financial system.
San Francisco Fed president Janet Yellen said yesterday she is forecasting the unemployment rate to peak below 6.0% in the present cycle from the current 5.5%, while describing credit conditions as tighter than the in last August. Her optimism for lower inflation expectations ahead may dampen expectations of a rate hike this fall. Although her remarks aren't widely shared by the rest of the FOMC, the more likely course of preference by the Fed is that of holding rates steady into the rest of the year.
San Francisco Fed president Janet Yellen said yesterday she is forecasting the unemployment rate to peak below 6.0% in the present cycle from the current 5.5%, while describing credit conditions as tighter than the in last August. Her optimism for lower inflation expectations ahead may dampen expectations of a rate hike this fall. Although her remarks aren't widely shared by the rest of the FOMC, the more likely course of preference by the Fed is that of holding rates steady into the rest of the year.