A “Symmetric” Fed

I did not count how many times the word “symmetric” appeared in the FOMC minutes, but it seemed to be in every paragraph.  It was used to emphasize that the Committee’s 2% inflation target should be viewed as a central tendency, not as the peak rate the Fed will accept.  They will tolerate some overshoot, just as they tolerated an undershoot for the past two years.  In other words, they will not tighten aggressively if the inflation rate were to move somewhat above 2%.

Markets focused on this as good news that the rise in the fed funds rate will remain slow.  That should not have been a surprise.  The FOMC has been saying this ever since they started raising the rate.  It does not mean, however, that the odds for another three increases in 2018 have dropped.  They are still probably above 50%.

The most likely path for the funds rate is a steady rise to around 3% in 2018-19.  What are the odds that a 3% yield on the 10-year Treasury can coexist with a 3% fed funds rate?  Probably quite low.  The Treasury yield would probably be in the 3 1/2% to 4% range.  That would suggest that it is still too early to be buying long-duration Treasuries.

 

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