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Yellen’s Finale, Looking Hawkish?

Yellen’s last meeting as Fed Chair saw the short term rate left unchanged as expected. The statement indicated a firmer belief that the Fed’s 2.0% target inflation rate will be achieved in the “near term”. Continuing strength in oil prices (now firming up at the $65 per barrel price) and long awaited pressure in wage growth are contributing to the bullish inflation outlook. Note that the closely watched Employment Cost Index rose 2.6% in 2017, the highest rate in a decade. Employment shortages are being reported in some major cities and/or sectors, in addition to well publicized employee bonuses being attributed to the tax cut. The speculation game is on as to how many increases in 2018? A March increase is considered “done” plus another two expected based on futures markets and the Fed’s own “dot plots”. Today’s statement spurred some expectations of four increases this year. The 10 year T yield crested about 2.75% today before settling around 2.71%. Supply/demand dynamics are also pressuring Treasury yields as the Treasury announced $66 billion in long term debt sales this quarter, the first increase since 2009. The cause is not the tax cuts, that hasn’t even been factored in yet. It’s the baby boomers as Medicare, Social Security and other costs are increasing. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners