Skepticism Mounts (Again) About The Next Fed Rate Hike
By Ben Eisen
The Wall Street Journal
The Wall Street Journal
August 15, 2017
The market is once again second-guessing whether the Federal Reserve can lift rates again this year.
The yield on the two-year Treasury note, which tends to rise alongside expectations for interest rate increases, fell to 1.29% from its early-July level of 1.41%, the highest since 2008.
In the fed funds futures market, where traders wager on the path of the Fed’s policy rate, there was a 36% chance of at least one more rate increase by the end of the year, down from 54% a month ago, according to CME Group.
The latest moves came Friday after the Labor Department said an index of consumer prices climbed 1.7% in July from a year ago, marking yet another month in which the data have undershot the central bank’s 2% target, as The Wall Street Journal’s Morning MoneyBeat newsletter noted on Monday.
It’s a confounding trend considering that the labor market continues to be strong. Economists have historically thought that a tight labor market should push up wages, and thus inflation. Another month of below-target inflation is leading investors to pare expectations for another rate increase this year.
But market prices can fluctuate quickly, and better economic data could lead to a shift in investors’ views. The central bank has lifted rates twice this year, and penciled in one more in 2017. Economists say the latest report provides no evidence that inflation is permanently stuck below 2%.
“The still-moderate pace is likely to keep Fed members convinced the decline in prices is ‘transitory’ and additionally reinforce the need for further policy adjustment by the end of the year,” said Stifel economist Lindsey Piegza, in a Friday research note.
Fed officials have long said they expect inflation to rise to the target level, but it’s only ever done so in fits and starts in recent years. In last month’s policy statement, the Fed said it expects inflation to “stabilize around the Committee’s 2 percent objective over the medium term.”
That means there isn’t ample reason yet for the Fed to massively speed up the pace of its tightening, investors say. Such a view is a reversal from late last year, when many bet that the election of President Donald Trump would lift growth and inflation, forcing the Fed to increase rates faster.
For now, it seems the easy-money policies that have helped push stocks to record highs aren’t going away in a hurry.
In the fed funds futures market, where traders wager on the path of the Fed’s policy rate, there was a 36% chance of at least one more rate increase by the end of the year, down from 54% a month ago, according to CME Group.
The latest moves came Friday after the Labor Department said an index of consumer prices climbed 1.7% in July from a year ago, marking yet another month in which the data have undershot the central bank’s 2% target, as The Wall Street Journal’s Morning MoneyBeat newsletter noted on Monday.
But market prices can fluctuate quickly, and better economic data could lead to a shift in investors’ views. The central bank has lifted rates twice this year, and penciled in one more in 2017. Economists say the latest report provides no evidence that inflation is permanently stuck below 2%.
“The still-moderate pace is likely to keep Fed members convinced the decline in prices is ‘transitory’ and additionally reinforce the need for further policy adjustment by the end of the year,” said Stifel economist Lindsey Piegza, in a Friday research note.
Fed officials have long said they expect inflation to rise to the target level, but it’s only ever done so in fits and starts in recent years. In last month’s policy statement, the Fed said it expects inflation to “stabilize around the Committee’s 2 percent objective over the medium term.”
That means there isn’t ample reason yet for the Fed to massively speed up the pace of its tightening, investors say. Such a view is a reversal from late last year, when many bet that the election of President Donald Trump would lift growth and inflation, forcing the Fed to increase rates faster.
For now, it seems the easy-money policies that have helped push stocks to record highs aren’t going away in a hurry.
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