To hear FRBNY President Bill Dudley describe things, it's hard to believe the U.S. had any economic growth at all in the 200+ years prior to the invention of the home equity loan. He places a sizable portion of the blame for the current sluggish recovery on the horror of homeowners deciding not to borrow against their homes for a vacation, or granite counters, or that new Yukon Denali.
Turning to the outlook, he says economic conditions - particularly inflation - do not warrant an aggressive response from the Fed.
The low interest rate environment isn't going to change just from "snapping fingers," St. Louis Fed President Jim Bullard tells CNBC. He continue to expect just one rate increase this year - even as the Fed "dots" say something closer to three.
As for the fiscal policy plans of the incoming administration, Bullard sees that as more of a 2018-19 story.
Goldman's Jan Hatzius has been pretty consistently more hawkish than most Street economists, and continues so in 2017. Speaking in London, Hatzius says the Fed could hike as many as four times this year.
That guess stands against Fed guidance of three, and short-term rate markets which have priced in just two moves.
Hatzius' baseline estimate is for three hikes - June, Sept., Dec. - but he's putting the odds of a March move at 35% (the Street's at 24% for March).
Looking longer-term, Hatzius doesn't see the rate hike cycle ending until Fed Funds is at 3.5% vs. the market's estimate topping out at 2%.
Upward pressure on wage growth and upward pressure on core inflation are the reasons behind Hatzius' thinking.
SocGen suspects investors have not forgotten about a powerful bond rally in each January of the past three years, each with its own rationale ("the 2H13 taper tantrum was reversed as the economy started to run out of steam; early 2015 saw the front running of the ECB’s QE; early 2016 saw a panic reaction to large capital outflows in China").
Still, firm says it does not expect a repeat:
The macro environment differs sharply. Global growth peaked in autumn 2013, and from there slowed down consistently into mid-2016. But it has now turned. Global inflation has also picked up, with U.S. wages, oil prices and the Chinese PPI all pointing north. Economic momentum into the turn of the year, especially in the DM world, is such that the global economy is likely to prove more resilient to shocks.
"The cyclical improvement, along with the ongoing reflation effort (U.S. fiscal stimulus in the pipe, ECB, BoE and BoJ remain very accommodative) will push market participants to reduce unprecedented exposure to the interest rate risk.
The 10-year Treasury yield is higher by seven basis points to 2.54% following the Fed rate hike and expectations for three boosts next year (up from two). That's the highest level since Sept. 2014.
That's a big move, but the real action is at the short end, where the two-year yield has moved up a whopping 10 basis points to 1.26%. As recently as the July 4 holiday, the two-year yield was about half of today's level.
We'd like to check Fed Funds futures to see what they're pricing in, but things are so busy at the CME, we can't get onto the website.
The yield on the 10-year Treasury note is above 2.5% for the first time since October 2014, as investors eye a key Federal Reserve meeting which begins tomorrow. The next notable yield is 3%, last hit in 2013.
Meanwhile, U.S. stocks are at all-time highs, with the Dow in striking distance of 20,000, but futures are sliding lower to start the week.
Will expectations of a Fed rate hike put a dent in the Trump rally?
Trades that performed best in the three weeks since Donald Trump's election victory are taking a breather, with the dollar and U.S. bond yields falling from recent peaks and equity index futures signaling stocks will slip from all-time highs.
The dollar could face further resistance in the week ahead given potentially risk-laden events such as the midweek OPEC meeting and Italy's Dec. 4 referendum on constitutional reforms.
Speaking to CNBC this morning, fund manager Stanley Druckenmiller - who had been pessimistic about the U.S. economy, said that he is now "quite, quite optimistic" on the U.S. economy following the election of President-elect Donald Trump. "It's as hopeful as I've been in a long time."
"I sold all my gold on the night of the election." Why? “All the reasons I owned it for the last couple of years seem to be ending", namely, expectations that inflation is now set to spike, forcing money out of safe assets - like gold and Treasurys - and into the dollar.
Druckenmiller said he now has a “large bet on economic growth. I’m short bonds, Bunds, Italian bonds, U.S. bonds.” The trades reflect his expectation of higher deficits and stronger growth leading to another surge in debt.
Druck said he is “hopeful” on the Trump administration and political climate. “I would not be surprised if we’re looking at the absolute peak of divisiveness.”
Standard & Poor's has given the all-clear to America's credit rating, affirming it at 'AA+' with a stable outlook.
"We assume the longstanding institutional strengths and robust checks and balances of the U.S. will support policy execution in a Trump administration, despite the president-elect's lack of experience in public office," the ratings agency said.
Moody's announced in September the election wouldn't impact its 'AAA' rating for the U.S.
Prior to tonight's election results, short-term rate markets had priced in about a 100% chance of the Fed boosting interest rates next month.
With a Trump victory looking more likely, U.S. stock index futures are down more than 4%, the 10-year Treasury yield is off 12 basis points, and Fed Funds futures are now pricing in less than a 50% chance of a December move.
Strategists are cautioning that a victory for either candidate could carry risks for Treasuries and the greenback.
A Clinton triumph would cement the already high expectations the Fed will raise rates in December, putting upward pressure on yields, while a Trump presidency would likely see Chair Janet Yellen excused from a second term.
With a path cleared for a Fed rate hike, the dollar is likely to gain momentum, but the full affects on the currency have been more ambiguous.