U.S. Bond Market Week In Review: A Rate Hike Is A Lock, Edition

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We had a number of Fed speakers this week. Philly Fed President Lacker stated, "The economy is displaying considerable strength." Regarding the employment situation, he approvingly cited the U3 and U6 levels, the historically low number of layoffs, and the high level of quits as indicators of labor market health. He believes inflation will be at 2% within the next 24 months.

Boston Fed President Rosengren also views the current situation positively. While citing U3 and U6 rates, he noted the unemployment rate for people with only a high school diploma was 5.1% and that the 12-month rolling average of the labor force continues to grow, indicating people are increasingly entering or re-entering the labor force. As for prices, he observed that CPI and alternate measures of inflation were below 2%, although, like Governor Lacker, he is forecasting a 2% rate by year end.

Chicago Fed President Evans recently argued for several rate hikes this year:

Chicago Federal Reserve President Charles Evans said on Friday the central bank could raise interest rates three times this year, faster than he had expected just a few months ago and in line with the majority of his colleagues.

The comments from Evans, a voting member of the Fed's policy committee this year, reinforced the view that the Fed could step up the pace of its rate hiking campaign if the incoming Trump administration unleashed a fiscal stimulus.

Evans has been an outspoken proponent of low-interest rate policy for several years.

"I still think two (Fed rate hikes) is not an unreasonable expectation," Evans told reporters in Chicago, adding that if the economic data comes in stronger than expected, "three is not going to be implausible."

In the current economic environment, it's difficult for any Fed governor to argue against raising rates. While the high U6 rate and lagging wage growth indicate labor market slack exists, the low unemployment and layoff rate and now increasing pace of wage gains all point to a healthy labor market. As rising oil prices work their way through the economy, inflation will eventually increase to the Fed's 2% level. The hawkish argument that the Fed doesn't want to get too far behind the inflation curve has increasing salience. Finally, while not stated by any Fed official, increasing rates now will give the Fed at some downward room to move, should the economy start to slow down.