The Fed is on a Mission, Doesn’t Worry about Markets: New York Fed’s Dudley
The Fed is on a Mission, Doesn’t Worry about Markets: New York Fed’s Dudley by Wolf Richter – Wolf Street
Oh my, how things have changed since late last year.
New York Fed President William Dudley, one of the big and influential doves on the policy setting FOMC, drove home the point today when he said at a roundtable discussion that the economic outlook was “pretty good,” and that he wasn’t seeing too much of a signal in the low bond yields.
Longer-term yields have caused a lot of gray hairs. While short-term yields have risen in response to the Fed’s rate hikes since December, longer-term yields have actually fallen since then – a sign that the bond market doesn’t believe the Fed’s current projections of four more rate hikes over the next two years, which would bring the Federal funds rate target to a range between 2.0% and 2.25%. By contrast, the 10-year yield is 2.18%.
Though low, those longer-term yields are still relatively high compared to the near-zero yields in Europe and Japan, he said. The Fed will have to keep raising rates at a gradual pace in order to avoid having to raise them so sharply in the future that it might trigger a recession, he said.
Dudley and the “suddenly hawkish” Yellen, as she has come to be called, are walking in lockstep. At its meeting last week, the FOMC has raised its target for the federal funds rate for the third time since December, like clockwork at every other meeting, to a range between 1% and 1.25%. The Fed has penciled in one more rate hike this year, and several more over the next two years.
In addition, it has now put in place a plan to unwind QE, starting “this year,” possibly as early as September, which will have the opposite effect of QE.