Fed Policymakers Talk, Talk, Talk; No Rate Action Seen Soon

What with the U.S. killing of a Iranian general; retaliation by the Iranian government; and a potentially downed airliner near Teheran, the Federal Reserve Board stood little or no chance of grabbing headlines last week.

It was Talking Heads week. No, not the band, but a band of Fed policymaking officials who made the following abundantly clear—again. All of which is good news, as my colleague Tom Lee points out. (See page 3.)

The Fed is and continues to stand pat. For the last few months, Fed officials have repeatedly insisted the Fed is on the sidelines on rate changes, pending the economic data. Second, the august central bank’s “management” of the giant U.S. economy is proceeding apace, the Fed says. It continues to take bows for not wrecking the economy last year. Well, fine. Of course, no one’s talking about the badly timed rate hikes the Fed made in the previous couple of years. Hush, hush, now.

There is an upcoming Federal Open Market Committee meeting at month’s end, but it will be a snooze. The CME Fed futures market, which I have found over the years is a better indicator of where rates are going than the FOMC’s data, says there is over a 90% probability of rates remaining unchanged.

And here’s a surprise, a little one. The fed futures have a 10% probability of a rate rise.
That’s more curious than anything else, but still it bears watching. No rate cut is seen until next December.

In any event, most of the Fed action was words. St. Louis Fed head James Bullard, not an FOMC voting member this year, said he believed the economy is headed for a “soft landing.” We beg to differ. We see the economy reaccelerating, as we’ve noted in these pages for the past months. Again, see page 3.

New York Fed President John Williams said Thursday low interest rates are likely to be a persistent issue for some time to come, which will create challenges for how central banks operate.

SOFR doesn’t fall from the lips as easily as LIBOR, but according to The Wall Street Journal, traders in the futures market are beginning to embrace the Fed’s proposed replacement for the troubled London interbank offered rate (LIBOR). Open interest in one-month interest-rate futures tied to the new secured overnight financing rate, or SOFR, more than doubled between August and December to about 375,000 contracts on the Chicago Mercantile Exchange.

The NY Fed continues to add tens of billions of dollars in temporary liquidity to financial markets, through overnight repurchase agreements, or repo, and 14-day repo intervention. The CME fed futures market, which currently puts the next rate change probability in December. The U.S. Treasury 10-yr note yield was around 1.82%, up from 1.79% last week and below 1.5% in September.

Upcoming: 1/28-29 - FOMC meeting. No action expected.

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