Parsing the Fed’s Noisy Rhetoric

Investors received a sampling of the divergence of viewpoints inside the Federal Reserve last Thursday when four Fed Governors gave speeches on monetary policy. The day was characterized by whipsawed trading in Treasury bonds (see 4/16 daily yield chart on 10-year Treasury yields below) in response to comments from Fed Vice Chair Fischer (“The Fed will probably raise rates later this year…”) and Boston Fed President Rosengren (“Data has not met the employment and inflation conditions for raising rates…”), as well as others.
 
We’re of the opinion that the Fed has plenty of time before they’ll need to raise the Fed Funds Rate, but even if they do move later this year (the current consensus is for a September lift-off), the pace at which they subsequently raise rates will very likely be gradual. For bond investors, more important than when is how quickly and by how much rates rise over the long-term. Goldman Sachs does a nice job of illustrating that current expectations for rate increases this time around are much lower than in prior tightening cycles, which is good news for bond investors.
 
Source: Bloomberg, CRT Capital, Goldman Sachs