Yellen’s Finale, “Sticking to the Script” ?

Next week’s Fed meeting, policy announcement and accompanying statement/presser has been heavily telegraphed in advance. There should be no surprises. First off, a 0.25% rate increase is a slam dunk, with the futures market at about 90% likelihood (note that the other 10% is on a 0.50% increase). Also, with Jerome Powell set to take over in early 2018, Yellen is unlikely to lay out policy for next year. So the focus will shift to Powell’s upcoming speeches/remarks and his first meeting as Fed Chair next month and beyond. Meanwhile, 30 day LIBOR is already up from 1.25% to 1.40% in the last month on anticipation of the move and year end liquidity issues. LIBOR’s “expiration date” of year end 2021 is gaining certainty as the Bank of England last week announced it is requiring participating banks to continue reporting until 2021, but they may stop reporting after that. This should add momentum to the alternative rates being discussed (SONIA in England, Overnight Treasury REPO in the USA). There is a lot of work to do in the next 4 years as trillions of dollars in derivatives and contracts need to be adjusted. Treasuries: The yield curve is flattening even more dramatically as the short end is certain of increases (see above) and the long end is still “show me the inflation and/or growth”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners