Wednesday, July 6, 2016

Fed patient on US rates due to Brexit, inflation: Dudley


This changes my personal view to less bullish on equities in 2016 as the hopes for some interest rate increases in 2016 wanes.

And further, whatever positive pitifully low US rates we had, they are now in full retreat since the Brexit as the US 10-yr has broken thru 1.5% and finished yesterday at 1.37%.

I'm sure the Fed is getting nervous as their portfolio yield is being reduced and converges upon their IOR liability; even their MBS is probably looking at increasing pre-payments as US mortgage rates approach all-time lows this week of 3.48% on a 30-yr fixed.

If this trend in rates continues they will be forced to have to lower their policy rate perhaps even to negative rates.  They may have missed their one opportunity to start to raise at this point.



New York Fed President William Dudley, meeting with business and community leaders in Binghamton, New York, said that the U.S. economy is doing "ok" on average but that it was too soon to tell the effects of last month's so-called Brexit referendum. 
A close ally of Fed Chair Janet Yellen, Dudley did not say when he expected the central bank to raise rates after having initially tightened monetary policy in December. But he cautioned there were reasons to wait and see.
"With uncertainties about the outlook and inflation being lower than desired, it allows us to be a little more patient," Dudley, a permanent voter on Fed policy, said in the heart of this former manufacturing city. 
"If you strip out the energy sector, inflation is still a little below what we would like... so that allows us to be patient in terms of letting the economy run with accommodative monetary policy in place," he said.


5 comments:

Michael Norman said...

The drag from low rates is not enough to stop the rally in equities, particularly given what could be record levels of spending this year. It's dissapointing, yes, but not that negative. And rates may still go up. Look at metals, copper, softs, and even energy. All rising.

Matt Franko said...

I'm just less bullish Mike... I was looking for 3 or 4 increases...

(I was pretty bullish....)

Malmo's Ghost said...

America is the safe haven. Money flooding here from all over the world I'm sure. Bonds will not be the only financial products being bought either. Stocks will benefit too.

Brian Romanchuk said...

As a note, the bond rally will not cause the Fed any problems for a long time. They locked in the long-term yields when they bought them; although the running yield is low, they will have a capital gain. Since I think they do not mark the portfolio to market, this will have no effect on their profits. Eventually, the bonds would mature, but the new bonds would likely be at a higher yield than the short rate.

(The Fed's profits are a political issue, not economic.)

Matt Franko said...

I'd keep an eye on it Brian...

All of their short term stuff is being redeemed and at very low rates... and the MBS are subject to prepayments and looks lke MBS are down to 2% range... so they have about 1T so 20B/yr rate that might be cutting it too close for them...

They need the flow to pay the IOR at 0.5% and this rate in USTs is inverted out to about 2 years...

Also, Congress has done some things with earmarking the Fed "profits" to fund highway appropriations which maybe they think they better come up with those USDs too....

NIRP would be a big problem for the member institutions... EZ banks are rolling over imo this is NIRP related rather than "austerity!" generally over there as attributed by the "some day!" crowd...

I dont trust these incompetents one minute....

Lets just hope we can make a new high in equities and all that hoopla will get them off the Brexit meme and they will start to raise again pronto...