In the third week of July 2017, Fed Chair Janet Yellen may very well have single-handedly reversed the momentum for short term interest rate hikes at the U.S. Federal Reserve.
Writing at Real Investment Advice, Lance Roberts had perhaps the best summary of what happened when the Fed’s Yellen testified before the U.S. Congress on Tuesday, 11 July 2017:
As I noted in yesterday’s missive, Yellen’s recent testimony on Capitol Hill sent robots frantically chasing asset prices on Thursday even before testimony began. The catalyst was the release of prepared testimony which included this one single sentence:
“Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.”
And on that statement, doves flew and algorithms kicked into to add risk exposure to portfolios. Why? Because she just said that rates will remain low forever. As my partner, Michael Lebowitz, noted yesterday:
“Per Janet Yellen’s comment, the ‘neutral policy stance’ is another way of saying that the Fed funds rate is appropriate or near appropriate given current and expected future economic conditions.
Two weeks ago, several Fed officials were working hard to set the expectation that the Fed would hike its Federal Funds Rate again at its upcoming September 2017 meeting, in the current quarter of 2017-Q3, where investors were split between that quarter and 2017-Q4 as being the most likely timing for the Fed’s next move to increase U.S. short term interest rates.
But after Yellen’s congressional testimony, investors are betting that won’t act to increase interest rates again until the first quarter of 2018 (2018-Q1), at the earliest.
We’ve been paying attention to CME Group’s FedWatch Tool, which uses Fed Fund futures to anticipate the level that the Federal Funds Rate set by the Fed will be on the dates when the Fed meets. In the following chart, which we’ve animated, we’ll scroll through what those futures indicate the probabilities for how the rate will be set after its upcoming September 2017, December 2017 and March 2018 meetings.
