Yesterday's Federal Reserve minutes gave no clear indication of when the bank might make the first of its projected three rate increases this year but as markets had largely discounted a hike next month reaction has been muted.
Fed officials at the January 31-February meeting said they were confident they could increase interest rates gradually and that a hike "fairly soon' could be necessary if the economy shows signs of overheating.
At last month's FOMC the committee voted to leave the target for the Fed Funds unchanged at 0.5 percent to 0.75 percent as had been expected. The prior meeting had seen the first 0.25 percent hike in a year, and only the second since the financial crisis seven years ago.
While the economy seems to be on an even keel at the moment with steady job creation and rising if limited inflation there is considerable uncertainty on many fronts.
The Trump administration’s fiscal, tax and trade plans are still largely unknown and national elections in Holland in March and France in April and May threaten the post-war structure of European politics. The leading candidates in each country, Geert Wilders in Holland and Marine Le Pen in France have said they will pull their nation out of the euro if they win.
Though many FOMC members “continued to see only a modest risk of a scenario in which the unemployment rate would substantially undershoot its longer-run normal level and inflation pressures would increase significantly,” price increase have sharpened substantially in the past six months.
The consumer price index has jumped from an 0.8 percent annual rate last July to 2.5 percent in January. What is perhaps more worrying for the Fed core CPI, excluding food and energy prices was 2.3 percent annually in January, as high as it has been since the recession and it has now been above the Fed's 2 percent target for a year.
The Fed's preferred inflation gauge, the annual core personal consumption expenditures (PCE) is the only measure that remains below the bank’s target. It was 1.7 percent in December, where it was in November and down from 1.8 percent in November. This measure has barely stirred for the past year varying just 0.1 percent between 1.6 percent and 1.7 percent with October’s 1.8 percent the sole exception.
Price pressures are elevated in the production pipeline as well. The annual producer price index of final demand has jumped form flat last August to 1.6 percent in January.
Fed Chair Janet Yellen said in Congressional testimony last week that “a further adjustment of the federal funds rate would likely be appropriate” if the economy continues to evolve in line with the bank's expectations. This has been the bank's standard evocation on the economy for more than two years.
The two-year Treasury yield was off three basis points from Wednesday's open at 1,19 percent (12:22 pm) and the ten-year was down three as well returning 2.39 percent (12:22 pm). The yields on both benchmark government securities have remained in tight ranges since the run higher prompted by the Trump election victory peaked in mid-December. The two-year have moved in a ten point range around 1.20 percent and the 10-year in a wider 20 point range around 2.42 percent.
Before the minutes were released, the Fed Funds futures were pricing in about a 34 percent chance of a rate increase at the March 14th-15the FOMC meeting. By Wednesday afternoon those odds hasd slipped to about 22 percent.
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