If the Federal Reserve’s announcement yesterday on interest rates was intended to keep the market guessing, the central bank scored a home run.
The bond market went exactly nowhere yesterday, although at various points the fixed-income set was alternatively bullish and bearish. But when the dust cleared, the 10-year yield was unchanged at 5.125% at Wednesday’s close.
In fact, shrugging one’s shoulders is an eminently reasonable reaction to yesterday’s Fed advisory. The rhetorical smoking gun from the FOMC is this line: “The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information.”
That’s a slight change from the previous statement in March, which said that “some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.”
Translated: a pause in rate hikes is all but assured when the FOMC meets next in late June. That implies that Fed funds rate is at or near the typically elusive state of monetary affairs known as neutrality. In Goldilocks fashion, a neutral Fed funds is neither too hot nor too cold, or so we’re told. Occupying this never-never land is said to neither promote growth nor retard it. Bernanke and company seem to be saying that we’ve now reached this state, and so further rate hikes are unnecessary, and perhaps even detrimental.
But there are no free lunches, even in the land of neutrality, which is fostering a bit more indecision than usual about what comes next, according to Ken Kim. An economist who watches the central bank for Stone & McCarthy Research Associates, Kim tells CS that decisions are getting trickier for the central bank:
Now that the Fed’s closer to the perceived neutral rate, unfortunately there is more uncertainty as to where the stopping point is [for rate hikes]. Even though they have models and forecasts, it’s hard to specify within a quarter percent of where you should be. I think we are at neutral. My personal opinion is that come late June, at the next FOMC meeting, they’re going to pause and leave the Fed funds rate at 5.0%.