| Thursday, January 4, 2018 | ||||||||
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 12/26/17 | 1.24 | 1.47 | 1.52 | 1.75 | 1.92 | 2.02 | 2.25 | 2.38 | 2.47 | 2.66 | 2.82 |
| 12/27/17 | 1.18 | 1.44 | 1.53 | 1.75 | 1.89 | 1.99 | 2.22 | 2.34 | 2.42 | 2.59 | 2.75 |
| 12/28/17 | 1.19 | 1.39 | 1.54 | 1.76 | 1.91 | 2.00 | 2.23 | 2.36 | 2.43 | 2.60 | 2.75 |
| 12/29/17 | 1.28 | 1.39 | 1.53 | 1.76 | 1.89 | 1.98 | 2.20 | 2.33 | 2.40 | 2.58 | 2.74 |
| 1/2/18 | 1.29 | 1.44 | 1.61 | 1.83 | 1.92 | 2.01 | 2.25 | 2.38 | 2.46 | 2.64 | 2.81 |
| 1/3/18 | 1.29 | 1.41 | 1.59 | 1.81 | 1.94 | 2.02 | 2.25 | 2.37 | 2.44 | 2.62 | 2.78 |
Source: U.S. Department of the Treasury, as of 1/3/18
Data Dependent, but …
The minutes from the December FOMC meeting were released yesterday, indicating a continuation of the gradual approach to raising rates, even as Janet Yellen steps down and Jerome Powell becomes the new Chairman in early February.
Although most participants support the gradual approach to tightening policy, the minutes show a split between policy makers who are more concerned about persistently low levels of inflation and those pointing to a solidly expanding economy that’s about to get a further boost from tax cuts. Apparently, there was a lengthy debate regarding reasons to slow the pace of tightening, or to accelerate the pace, depending of course on what happens to inflation.
Like many economists, FOMC members are struggling with the uncertainty of the economic impact of tax policy changes. Tax reform is expected to provide a modest boost to household spending and business investment in the short-term, but policy makers, as well as many economists, are not viewing the new legislation as a long-term game-changer.
As such, there’s no sense of a meaningful shift in the trajectory of the overnight target rate. The median expectation of FOMC members is still for three more quarter-point rate hikes in 2018, finishing the year in the 2.00% to 2.25% range.
Market reaction, however, seems to sense an increasing risk of an accelerated pace of tightening. While the direction of policy will remain data dependent, the composition of the FOMC is changing with several of the more “dovish” voting members rotating to non-voting members this year.
The Implied probability of the Federal Funds Target Rate is shown below. The futures market now indicates an 87% probability of another increase at the 3/21/18 FOMC meeting, up from 74% just two days ago.
Source: Bloomberg 1/4/18
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