Are You Listening?

The past week was full of Federal Reserve speeches, which, yeah, I wouldn’t blame you one bit if you tuned them out completely.

But I listen to what they say, though not because I’m a masochist. Staying on top of the Fed is my bread and butter, after all. Keeping up with the Fed’s various statements – especially Fed Chair Janet Yellen – filtering out the noise from the actual substance helps me answer the most important question for the markets and my readers: what’s the Fed’s agenda?

After the rate hike last December, the markets didn’t expect the Fed to hike rates until June at the earliest. But the markets learn and adapt quickly (far quicker than the Fed!) and so by the time the Fed announced a  rate hike last week, the markets already priced in a 100% likelihood of that happening. How did that happen?

I wrote earlier this month (just before the rate hike, in fact) that “one of the most effective policy tools of the Fed is talking. In the name of being transparent, the Fed believes it can move interest rates in one direction or another by just talking […]Over the last few weeks, a number of Fed officials said a rate hike is likely on March 15. And it’s not just the officials who are usually more prone to hike (we call them hawkish), but also a few that usually are more cautious (dovish) have chimed in that it’s time for a hike.”

So, what was their agenda? When Fed officials speak they always have an agenda; it could be dry and academic, or maybe a third party wants their individual opinion and expertise. But when you hear a coordinated message from a number of officials in a short period of time, it’s part of an agenda to change the mindset of the markets. Take a look at what that looks like below:

Yields spiked from well below 3% when the market didn’t believe a rate hike was coming anytime soon to just over 3.20% at the peak before the hike.

I guess you could say the Fed did a good job preparing the markets for their quarter-point hike! But what’s happened since? Well, take a look below:

As you can see, yields fell back to where they were before all the Fed talk. But to be fair, the Fed controls the federal funds rate – in other words, the overnight rate the Fed charges to member banks to meet reserve requirements, and not the long-term rate above.

Of course, the Fed prefers to control the entire yield curve, but it has its limits. Its policy tool of increasing the overnight rate seems to have had less impact on the market than its other favorite tool… talk.

This week, there were more than a dozen scheduled Fed talks and as I’m writing, six have spoken about one thing or another. Their audiences include a group of university economics students, women in housing and finance, and even the Bank of England.

But I don’t see another coordinated event to move the markets and it’s unlikely they will use that tool for a while… the next Fed policy meeting isn’t until early May.

What’s good for us is that market volatility has risen with Fed action and talk, and that means more trades for Treasury Profits Accelerator readers – up or down, we make money when the Treasury bond markets overreact! Talk is cheap, so the saying goes, but volatility sure isn’t.

Good investing,

 

 

 

 

Lance Gaitan
Editor, Treasury Profits Accelerator

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Categories: Interest Rates

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.