Traders Still Don't Believe the Fed Is Ready to Raise Rates
Janet Yellen, chair of the U.S. Federal Reserve, speaks during a Senate Banking Committee hearing in Washington, D.C., U.S., on Tuesday, Feb. 24, 2015. Yellen said inflation and wage growth remain too low even as the job market improves, and she signaled that a change in the Fed's guidance on interest rates won't lock it into a timetable for tightening.
Andrew Harrer/Bloomberg *** Local Caption *** Janet YellenThere was no applause meter for Federal Reserve Chair Janet Yellen today when she testified before the Senate Banking Committee. But every word from her mouth was processed by the modern equivalent: the Fed funds futures market, which is exquisitely sensitive to the utterances of the Fed chief. While economists who watched Yellen concluded that she was signaling the Federal Open Market Committee will start raising rates in June, the futures market clap-o-meter indicates no such thing. Bloomberg's World Interest Rate Probability function, which is based on futures trading data, sees only a 17 percent probability that the top end of the Fed's target range will go up at or before the June meeting of the rate-setting committee.
This chart derived from the World Interest Rate Probability function shows the shifting estimates in the futures market of when the Fed rate liftoff will begin. Notice the drop at the very right-hand side, a reflection of market reaction to today's testimony: