Bond prices are lower today after yesterday’s Fed rally. Bullish traders took some minor changes in the wording of the Federal Reserve’s FOMC statement to mean the Fed will not tighten this year and might not tightenperiod.
Traders are great jumpers. A month ago, after Draghi’s seemingly innocuous speech, bond traders jumped to the conclusion the European Central Bank (ECB) would take action to reduce stimulus and the Fed would be free to ramp-up its balance sheetreduction program as well as tighten. Yesterday, traders jumped to the completely opposite conclusion.
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The fact is, no one, including officials of both central banks, knows what the Fed or the ECB will do. If the consumer price index is up a couple of tenths two months from now, the bond market will leap back to the conclusion of more tightening to comesoon and the start of the balance sheet reduction program.
Inflation is now the key. Bond movements on words by central banks are simply noise.
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.