The Fed
New Federal Reserve (Fed) Chair Janet Yellen testified before the Senate last month, repeating the message from her House testimony that only a sizable change in the economic outlook would modify the course of tapering. Yellen also signaled the Fed is moving away from isolated quantitative measures, such as the unemployment rate, in determining its decision to raise interest rates.
Yield Curve
The U.S.Treasury yield curve barely moved last month due to low volatility in the marketplace. The yield spread between the 3mo-Tbill and 5-year Tsy fell by only 0.01%.while the 2-year and 5-year spread climbed by just 0.02%. Due to lackluster economic data and low volatility the market may be pricing in a longer Fed tapering time frame.
Interesting Observation
Anxieties Decline – Fears of interest rates increasing have steadily declined over the last 6 months as interest rate volatility reached its lowest since the Fed announced the possibility of a taper last year.
Monthly Wrap-up
Federal Reserve Chair Janet Yellen is active in ensuring the market that there’s little difference between herself and former Chairman Bernanke. She has done such an effective job that bond market volatility has plunged this year and is now approaching levels not seen since before the Fed originally signaled last May its intention to taper bond buying. This complacency highlights the progress the Fed has made in reassuring the market that its pullback in bond purchasing will not automatically lead to higher interest rates.
There is no denying that economic data have been weaker than expected this year, but there is much debate on how much can be attributed to the weather. From housing to employment to manufacturing, weather has been the blame for the recent weakness. After all, this winter will be known as one of the worst (if not the worst) in our lifetimes. One side believes that once the weather improves consumers and businesses will renew spending, manufacturing and hiring activities. Alternatively, the other side believes that the weather is an excuse for a shifting cycle toward a fundamental economic slowdown. Unfortunately, the brutal weather makes it difficult to clearly identify trends underlying this economic activity. As we enter into spring, we will soon know who is right.
