By Doug Noland
May 20 – Bloomberg (Susanne Walker Barton): “Treasuries fell, heading for their biggest weekly drop since November, as Federal Reserve officials indicated they’re considering a June interest-rate increase should economic data remain steady… A measure of volatility in the $13.4 trillion Treasury market rose Thursday to the highest level in more than a month. Investors were caught off guard by the hawkish tone of Fed communications, lulled into complacency amid signs of sluggish global economic growth.”
I’ll assume the FOMC would prefer to boost rates another 25 bps. They seek to at least appear on a path of “normalization,” dissatisfied with the “one and done” tag. Perhaps they have also become more attentive to the risks associated with prolonged near-zero rates for banks, insurance companies, money funds and the financial industry more generally. Recent economic data would tend to support a more hawkish bent, with a firming of GDP and inflation trajectories. I’ll stick with the theme that currently the key economic dynamic is neither growth or recession, but instead major imbalances and various boom and bust dynamics.
Members of the FOMC have voiced unease with market expectations having of late diverged from Fed thinking. The Fed expects a series of rate increases, yet the markets anticipate little movement on rates. The FOMC is “data dependent,” and sees economic fundamentals supporting a move toward a somewhat more normalized rate environment. Markets, on the other hand, see global market fragility and a Federal Reserve held hostage by unstable securities markets (and a “risk off”-induced “tightening of financial conditions”). The markets’ perspective is certainly supported by the Fed’s repeated skittish responses to any evolving “risk off” dynamic.