If you spent Monday staring at the ceiling and wondering what to do, you may have more in common with Federal Reserve Chair Janet Yellen than you think.
Yellen’s been pondering an interest-rate hike since she started her term as Fed chair, and, until recently, most pundits thought the Fed’s powerful Federal Open Market Committee would announce its first rate hike in six years at its Sept. 17th meeting.
But Monday’s sell-off in stocks and commodities — as well as the plunge in bond yields and renewed fears about the global economy — may push back the Fed’s first rate hike as far back as March 2016.
The Federal Reserve has two mandates: To keep inflation low, and to keep the economy running smoothly. Currently, however, the main enemy looks like deflation, not inflation. The consumer price index, the government’s main gauge of inflation, was virtually unchanged the 12 months ended July.
And many commodity prices have collapsed. Light, sweet crude oil — the kind the U.S. produces — has fallen 60% from last year. “Industrial metals prices are at their lowest since July 2009, the first month of the recovery,” says John Lonski, managing director and chief economist for Moody’s Capital Research Group.
The markets, too, are arguing against inflation.
When bond traders think inflation is in the air, they demand higher yields. But there’s not a whiff of inflation in the Treasury market: The bellwether 10-year Treasury note yield is currently hovering near just 2%. Comparing a 10-year T-note to a 10-year Treasury inflation-protected note shows that Wall Street expects inflation to be 1.56% for the next decade.
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