Filtering Rumors of the Fed Rate Hike

The stock market has become the marketplace of rumors.  Now it seems the same is true for the bond market as well.  Rumors have been floating around that the Fed may raise the discount rate again (as soon as today) on another off-FOMC meeting basis.  This is not the critical Fed Funds level set at 0.00% to 0.25%.

We previously noted in “The Rate Hike Cycle Begins” back on February 18, 2010, that the rate cycle is now finally started to be unwound.  The discount rate is the interest rate that depository institutions are charged to borrow short-term funds directly from the Federal Reserve.

We keep hearing about “an extended period” that the Fed Funds rate can remain extremely low.  It depends upon whom you ask, but the “exceptionally low for an extended period” does not assure that no rate hikes are coming.  Even if rates went to 0.50%, that would probably be “exceptionally low.”  I can remember selling CDs to banks in 1989 at 11%, and then when I was a bond broker the notion of short-term rates being 3% seemed “exceptionally low.”

The problem today is that the FOMC may lose some added credibility even if just chooses to raise the discount rate.  Hiking the rate in the same week where there was only one single vote out of ten votes for a rate hike just does not seem enough oomph inside the bond market to justify yet another surprise.

The stock market is said to be a market of stocks.  It is turning out that the bond market and the stock market are becoming a market of rumors.

Early this morning we saw yields for the 10-year at 3.64% and the 30-year at 4.575%.  In early afternoon trading, those yields are 3.67% on the 10-Year and 4.593% on the 30-Year.

JON C. OGG