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Yellen Signals Rate Hikes but When?

Posted by Joseph Trevisani on Feb 14, 2017 4:46:23 PM

Equities gained another record, Treasury yields and the dollar rose after Federal Reserve Chair Janet Yellen said if the U.S. economy improves as expected then more rate increases would be appropriate.  

“Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” she noted in Congressional testimony on Tuesday. 

The Fed's own predictions at the December 14th meeting posited three 0.25 percent hike in 2017. but the futures markets has been doubtful with less than 50 percent odds for three increases this year, with the first in June. The chance of an increase at the March meeeting rose a slight four points to 34 percent after Ms Yellen cited gains in consumer spending, income and wealth as signs that the U.S. economy may require higher interest rates. 

Even if the Fed completed its projected 0.75 percent increase this year the Fed Funds rate would still be just 1.5 percent  in December less than half its historical average. 

The Dow rose 92.25 points 0.45 percent to 20,504.41 it's fourth recod close in a row bringing the surge since the election of President Donald Trump to 14.6 percent.  The S&P 500 jumped 8.33 points, 0.36 percent to 2,337.46 its sixth straight gain and fourth record. It has added 12.1 percent since the November election.  The Nasdaq Composite and the Russell 2000 Index set new all-time highs as well. 

 The yield on the 10-year Teasury rose 4 basis points to 2.47 percent. .The 2-year added 3 points to 1.23 percent and is just 6 points from the post-election and eight year  high of 1.30 percent on December 15.  The ten year yield is 17 basis points from its 2.64 percent post-November high, but it remains well below its eight year top of 4.00 percent  from June 2009. 

The dollar rallied modestly on the prospect of higher U.S. rates, rising against the yen,  sterling , euro  Swiss Franc and Canadian Dollar but losing a small amount of ground versus the Australian Dollar.

Joseph Trevisani

Chief Market Strategist


Charts: Thomson/Reuters

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