Powell on Deck as Yellen’s Final Minutes Move Markets

Today’s release of the January Fed minutes (Yellen’s final meeting as Chair) definitely roiled both bond and equity markets. Again, the contrarian nature of the bond markets inverse relationship to economic news is in focus. The Fed statement indicated increased confidence and surety in the economic recovery (as opposed to last year’s “spotty” recovery). The committee increased economic projections from their December meeting. One of the most interesting phrases contained in the statement: “upside risks” referred to increased growth estimates due to a variety of factors including the tax cut and other recent economic reports. So all this good news caused selling in both bond markets (the 10 year T hit a 4 year high of 2.95%) and stock markets. Note that stock traders initially saw the minutes as “dovish” as the statement discounted the possibility of runaway inflation and rallied, but then sold off as they saw the bond market yields spike and realized that the statement may indicate four rate hikes this year instead of the previously expected three hikes. Today’s volatility demonstrated that the return to “normalcy” will be a bumpy road as all asset classes try to find their “market” price/value without extraordinary measures from the world’s Central Banks. Next up: New Chair Powell’s first congressional testimony next week and more closely watched post holiday employment and inflation reports. Our borrowers can take some comfort as spreads have tightened, keeping loan rates relatively low for now. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners