I posted last night a piece entitled "Sunday Evening Hilsenrath" in which he opined on why the projections of FOMC members forecast a 2 percent funds rate in 2016. I noted in that post and in other ruminations that the market anticipates a terminal funds rate around 4 percent.
The Hilsenrath story suggests that the funds rate will stay low for longer as long as inflation does not rear its ugly head. This morning, Kit Juckes of SocGen in his morning note quotes a portfolio manager who states specifically that he believes that the FOMC will not raise rates appreciable as long as inflation remains below 3 percent. This story appears to be gathering some steam and could power 10s and 30s to even bigger gains versus their yield curve compatriots. Here is an excerpt from the morning note of Kit Juckes at SocGen:
"I liked a quote in the Wall Street Journal from Gordon Fowler of Glenmede Trust, who reckons that until inflation gets to 3% and stays there, the Fed won't raise rates enough to hurt economic growth or impair stocks. Put that with John Hilsenrath's piece in the same paper, where he wonders why FOMC members see rates just over 2% at the end of 2016 when they consider 4% appropriate for an economy running on all cylinders. and the message is clear - for all the excitement over last week's FOMC meeting, and the likely clarifications we are getting this week, there is still an underlying belief that the Fed will allow a lot more asset inflation before they tighten enough to dent economic or financial market sentiment, because the consumer inflation that would scare them remains absent. That's a bond-bearish, dollar-neutral, equity bullish view of the world, albeit one that would be shaken up by any sign that inflation was picking up faster."