Bond Traders Bet Fed’s Aim Will Be Off

The markets react mildly to yesterday's Fed meeting.

I don’t recall the stock market ever having so little reaction to Federal Open Market Committee meeting before.

Stock traders did nothing on the news that the Fed is not changing short-term interest rates and will reduce its bond holdings. They clearly have bigger things, like tax reform, on their minds.

Bond traders did have a negative reaction the yield curve flattened as traders put on flatten trades but the move was relatively minor given how much the Fed statement and chair Janet Yellen’s press conference differed from what they wanted to hear. Bullish bond traders wanted to words of doubt about the future; instead, the Fed laid out a clear path and showed little sense of reticence.

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The reaction in the bond market to yesterday’s events was relatively mild for a couple of reasons. First, the bond market had already moved up rates from the lows over the past seven days. Second, traders know the Fed’s track record in guessing the path of rates is not great or even good. Traders are betting this is still the Fed that can’t shoot straight.

Read more about the dot game, the securities runoff program, and projections for the funds rate.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

September 22, 2017
CreditUnions.com
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