The Presidents of the Atlanta and New York Federal Reserve Banks made a determined pitch today to keep the possibility of a Fed Funds increase in play for 2015.
Atlanta Fed President Dennis Lockhart, who voted against a rate hike at the September FOMC meeting, said “The economy remains on a satisfactory track, and, speaking for myself, I see a liftoff decision later this year at the October or December FOMC meetings as likely appropriate,” in a speech in New York Friday.
William Dudley, his colleague at the New York Fed, also a negative voice at last month's meeting, said that he still forecasts a rate hike this year, "but it's a forecast and we're going to get a lot of data between now and December, so it's not a commitment," in an interview with CNBC.
Part of the reason for today's volubility is to keep the markets from running with the idea that a rate increase is no longer an immediate concern. Since the September 17th FOMC meeting markets have increasingly put the likelihood of an increase into 2016.
Futures data predicts just a 39 percent chance of an increase this year. That is down from a more than 60 percent chance prior to the Fed meeting.
Equity and commodity markets have rallied, the dollar has gone down, emerging markets and commodity currencies have soared and the credit markets, probably the most accurate predictor of Fed policy show little sign of an impending rate hike.
In the aftermath of the September FOMC, the yield on the generic 2 year Treasury fell 13 basis points that day, from 0.8108 to 0.6795. The yield continued to drop for another two weeks, shedding another 14 points to the 0.5379 low on October 2nd.
The yield has staged a modest recovery in the past week, moving back to 0.6490 as of 12:45 pm today. But it is still a far cry from the four and a half year high at 0.8148 on the 16th when expectation was widespread that the central bank was about to hike for the first time in almost a decade.
Likewise the 10 year Treasury yield has seen a small recovery recently, trading to 2.1076 at 12:56 pm today. It had collapsed 40 basis points after the FOMC, from 2.3012 on the 16th, a six week high, to 1.9022 on October 2nd.
This is not the first time that Mr. Dudley has tried to inject a note of caution into market sentiment.
In late September he said that the Fed remained on track for a rate hike this year and could reach its inflation target next year, before many analysts anticipate. He specifically noted that the hike could, given an improving economy, come as early as October.
Markets are apparently not buying what Presidents Lockhart and Dudley are selling. Neither the previous comments of Mr. Dudley or today's remarks have had an appreciable effect on market levels.
Perhaps the intention of the Fed’s ‘transparency’ has become a bit too transparent.
Chief Market Strategist
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