On the June FOMC
A three-in-a-row rate hike at a quarterly FOMC meeting, despite a CPI inflation surprise. Treasury yields fell at this morning’s CPI announcement, but this makes three-for-three: a big yield drop coinciding with a rate hike. But almost all the drop in the 10-year yield from the March highs has been in the inflation-compensation component. Weak inflation has been driven primarily by the weak oil price, now negative year-on-year. At present low inflation rates, the nominal funds rate is just half a percent below the Fed’s neutral rate of interest, which is why the curve expects no more hikes for a year. The FOMC statement finally formally acknowledged an intent to reduce Treasury and MBS holdings, and published a separate statement detailing gradually rising caps for non-reinvestment. No more specific timeframe was given for inception – only “this year,” with qualifications. We continue to believe purchases made little difference – as will non-reinvestment.