This article was written by Invesco PowerShares Senior Fixed & Equity Income Product Strategist Joseph Becker.
In December, Federal Reserve (Fed) Chair Janet Yellen unofficially established a game time of sorts when she noted that being “patient” meant an interest rate hike is unlikely before April. In response, a majority of economists surveyed by Bloomberg seem to have started a shot clock, interpreting “patient” to mean the first hike will be in the books sometime this summer.1
In late January, noting “solid” expansion of activity and “strong” job gains, the Federal Open Market Committee provided no indication of any change in the timing for a potential summer rate hike. A few days later, St. Louis Fed President James Bullard reiterated his view that “a zero interest rate is not the right rate for this economy.”2
Longer time coming?
But for all the signals pointing toward a summer rate increase, there are opposing indicators, including these:
- Within the contrarian camp, economists at Morgan Stanley recently pushed out their forecast for a rate hike from January 2016 out to March 2016.3
- Since the end of the third quarter of 2014, the projected fed funds rate for January 2016 has trended lower, as shown below, perhaps leading President Bullard to observe that, “The market has a more dovish view of what the Fed is going to do than the Fed itself.”
Lower Projected Fed Funds Rate Signals Market’s More Dovish View
So while the Fed and majority of economists seem to point toward a mid-year rate hike, the market —along with a handful of contrarians — suggests any hike isn’t likely to happen this year.
Implications of rate hike timing
There’s currently plentiful speculation about whether the Fed will raise rates in 2015. But perhaps a more important consideration is what a Fed move would mean, given the changing landscape. A Fed rate hike is, of course, not without broad-reaching implications, but here’s why the long end of the curve may prove a favorable place for investors to be, regardless of what the Fed does.
1. In spite of the fact that the Fed has just entered its seventh year of a 0.25% target rate, the ongoing flattening of the yield curve seems to reflect the bond market’s increasing skepticism about the economy’s ability to grow, as well as the Fed’s ability to influence it. If investors are skeptical to begin with, it’s difficult to see how a growth-restraining rate hike would make investors more optimistic.
President Bullard may have also had January’s flattening curve in mind when he attributed a dovish stance to the market.
Yield Curve Tilted in January to Its Flattest Level Since 2008
