It’s not much to hang a rally on, but the Treasury and stock markets moved up after Fed chair Janet Yellen told the House Financial Services Committee today that “the federal funds rate may not have to rise all that much further to get to a neutral policy stance.”
The market interpreted that to mean that the Fed is concerned about the persistently low rate of inflation and that it doesn’t see a need to raise interest rates except very grandly with inflation so low. (It could also mean that the Fed doesn’t see the need to raise rates all that much since its plan to reduce its portfolio of Treasury bonds and mortgage-backed debt will amount to a tightening of monetary conditions. But thoughts on that topic are for another market session, it appears.)
The market has already been operating under the assumption that the Fed would raise interest rates only gradually–since the Fed has repeated that guidance several times–so it’s not quite clear to me how much more gradual the bond market now expects interest rate increases to be. But after Yellen’s remarks prices on the Fed Funds future market moved to indicate just a 52% chance of a December interest rate increase. Yesterday the market had priced in a 58.9% chance of an interest rate increase.
Treasuries rallied across the yield curve with the yield on the 10-year Treasury dropping four basis points to 2.32%. The U.S. Dollar index finished the day unchanged.
I don’t think Yellen’s comments would have had even that relatively minor effect on Treasury prices (up) and yields (down) if global bond markets weren’t coming off a decent sell off in the last week or two.
On the equity side of the financial markets, the Dow Jones Industrial Average climbed 0.6% to a new record high. The Standard & Poor’s 500 moved up 0.7%, and the NASDAQ Composite rose 1.1%. The CBOE S&P 500 Volatility Index (VIX) fell 5.432% to 10.30 at the close.