Janet Yellen Still Pitching A Rate Hike But Markets Do Not Buy It

The news wires have been filled with Fed news over the past few days. In essence, there is an agreement that the June rate hik is off the table … again…

Janet Yellen, on Wednesday, expressed less eagerness to hike interest rates, as the U.S. central bank showed concern over both the economy and the faltering stock market. In a dovish statement after a two-day meeting, Fed officials said inflation is expected to remain “low in the near term” and the economy has “slowed.”

Surprise? Not really, the recovery story is a farce. The global economy is not in recovery. And no central banker’s spin will do away with the economic reality. The world’s financial system is loaded with debt, artificially bloated and overdue.

Confidence that inflation will move up to the central bank’s 2% target was a central condition the Fed had set out for more rate hikes. As expected, the Fed funds target range remained unchanged at between 0.25% and 0.5%. In December of 2015, the Fed increased its benchmark interest rate for the first time in nine years, and signaled it planned to raise it by one percentage point in 2016.

But the economic news since that December meeting has tended to conflict with the case for the envisioned four quarter-point rate hikes.

The May employment report killed the chances of a rate hike in June, and it was so weak that July does not look likely neither. The data might bounce in the direction of July. Therefore, the Fed will hardly want to take July off the table quite yet, and, in line with the past, the more hawkish members of the FOMC will keep up the tough talk in the coming weeks.

The key thing, however, is what the market thinks, and data points suggest that the market is not buying it! In the following chart, the probabilities of a rate hike in June, July and September are depicted, derived from market rates. Chart courtesy: Fuw.ch.


Savvy investors will come to their own conclusions. So does the Mountain Vision team.

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