An Awkward Question for the Fed

Fed Chair Janet Yellen yesterday reaffirmed the case for keeping interest rates near zero percent and raising rates slowly in the future. But the Treasury market seemed to have a mixed reaction. The 2-year yield–widely followed as the most-sensitive spot on the curve for rate expectations—ticked higher, rising to a five-and-a-half-year high of 0.94% yesterday (Nov. 23), based on constant maturity data at The benchmark 10-year yield, by contrast, slipped to 2.25%–comfortably below the recent high of 2.50% from mid-June.

The diverging trends in the 2- and 10-year yields of late seems to capture the spirit of the times. On the one hand there’s a growing sense that the Fed will start raising rates at its policy meeting next month, if only slightly. But with economic data painting a lukewarm growth profile in recent months, along with low inflation that remains well below the Fed’s 2% target, there are no smoking guns in the cause of squeezing monetary policy.

Speaking of mixed messages, consider the following. On the one hand, the Fed fund futures market is pricing in a 70%-plus probability that Yellen and company will raise rates above the current zero-to-0.25% target at the Dec. 16 policy meeting, the FT reports today. Yet the effective Fed funds (EFF) rate shows little if any upward bias. Indeed, as the chart below shows, the latest published EFF is at just 0.12% and the 30-day average EFF continues to tick lower. For the moment, it doesn’t appear that the central bank is laying the groundwork for a rate hike.


Perhaps the monetary mavens are waiting to see more data. There’s certainly a rich lode of numbers scheduled for release between now and Dec. 16, starting with today’s revised data for Q3 GDP and tomorrow’s October reports on new durable goods orders and personal income and spending.