After apparently falling ill in the middle of a speech given at the University of Massachusetts last week, Federal Reserve Chair Janet Yellen has recovered nicely from her bout of dehydration—much unlike inflation, which remains virtually nonexistent.
The Fed Chair, along with several other members of the FOMC like St. Louis Fed President James Bullard and New York Fed President William Dudley, has been busy talking about inflation lately. Repeatedly, these members have supported their position that the Fed should raise interest rates soon on the expectation that inflation will pick up significantly in the near future.
The bond market doesn't seem to believe them, nor does Chicago Fed President Charles Evans.
Fed Playing the Hawk
The only member of the FOMC to dissent from the committee's consensus (in a 9-to-1 vote) not to raise rates in September was Richmond Fed President Jeffrey Lacker; Charles Evans is also a voting member of the FOMC this year. Though the other committee members seemed to agree with Evans by virtue of the vote they cast, the rhetoric from these same members has been rather hawkish since the no-vote. Yellen, Dudley, Bullard, and others have been adamant about rates rising soon, and there being no need to wait until after 2015 to do so.
Their words simply don't square with their actions, however.
Evans told an audience at Marquette University this week that, given the consistently and stubbornly low inflation, he doesn't think a rate hike will be appropriate until about the middle of the next year. When you look at where inflation data has been going over the last 8 or 9 months, it's hard to argue with his logic.
The Fed finished its taper off of the quantitative easing program a full year ago, during October of 2014, and inflation has still consistently trended between a paltry 0.2% and even as low as -0.1% in every month of this year. That gives a monthly average of a mere 0.0125%—one-eighth of one-tenth of a percent. As a reference, monthly inflation in the U.S. hadn't been negative since 2009, when serious deflationary trends swept across the economy throughout the year.
Bond Trading as a Gauge
Even with the rest of the Fed (excepting Evans) repeating their line that inflation will accelerate, trading in the Treasury market would indicate otherwise. The spread between T-notes and the TIPS (Treasury Inflation Protected Securities) of the same maturities is at its lowest in 6 years, meaning that the markets are pricing in next-to-nothing for inflation over the next few years. Moreover, 10-year Treasury yields have fallen to the 2.08%-2.10% range after a surge in demand. Traders likely wouldn't want to pile into government bonds if they believed that a rate hike were imminent.
India's central bank cut its benchmark rates again, continuing the trend of global rates falling down toward zero (where the U.S. dwells for the moment), rather than the other way around. Global stocks are also getting punished, falling to a 2-year low. Overnight, Shanghai lost 2%, Hong Kong lost 3%, and Japan's Nikkei 225 lost 4%. The Dow Jones threatened to close below 16,000 on Tuesday, opening trading at just 16,001.89.
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