Fed raises rates by quarter-point for second time in three months

I am unsure what the Treasury market reaction will be, but my guess is that it will surprise some people who expect yields to be much higher than they are.

The odds of a rate hike at the US central bank meeting that ends Wednesday began to rise sharply from late February, with the probability now seen as 95%.

In the past, the Fed has typically sought to use higher rates to cool off inflation and offset future price increases. But judging by the recent solid performance of Asia's emerging markets, the Fed's grip on developing economies is markedly weaker than before. Inflation, which had stayed undesirably low for years, is edging near the 2 percent annual rate that the Fed views as optimal. Monday's calendar was decidedly light, and the Standard & Poor's 500 index flipped between modest gains and losses before closing at 2,373.47, up just 0.87 points, just 0.04%.

The Federal Reserve sets the rate for the overnight exchange of money by banks; governors adjust the rate to help curb inflation or stimulate growth, depending on their assessment of what would be best for the economy. Yet there's no indication in today's piece that Trump's former "belligerence toward the Fed" consisted of repeated attacks on Yellen for not raising rates-the action that is now said to be putting Trump and the Fed on a collision course. The yield on 10-year Treasuries now stands at 2.6%, barely positive in real terms and below its level three years ago when fears about deflation were widespread. Could this be the answer to the $1.3-trillion student-debt crisis?

As has been typical of prior monetary policy tightening cycles, the Fed's moves have been felt mostly in short-dated bond yields, with less effect on the mortgage markets or other long-term financing important to economic growth.

Meanwhile, the US Producer Price Index rose 0.3 per cent month over month in February, and rose 2.2 per cent on the year, compared with a 1.6 per cent year on year increase last month.

China's own financial markets have also been enjoying a period of calm over the past year. GDP expanded 1.9 percent in the fourth quarter of 2016.

Still, there are no grounds for complacency - indeed, quite the opposite. Markets are also betting on a potential economic boost from President Donald Trump's proposed fiscal policies. The yield on the benchmark 10-year note fell 8 basis points to 2.52% shortly after the release.

Oil prices rebounded on Wednesday, lifted by a surprise drawdown in USA inventories and data from the International Energy Agency suggested OPEC cuts should create a crude deficit in the first half of 2017. Brent crude, which is used to price global oils, rose 9 cents to $51.46 a barrel in London.

"We have not discussed the detailed policy changes that could be put into place" by Trump and the Republican Congress, Fed Chair Janet Yellen said in her press conference, "and we have not tried to map out what our response would be to particular policy measures".

Nicholas Spiro is a partner at Lauressa Advisory, a specialist macroeconomic and property consultancy in London.

  • Zachary Reyes