It's Going to Be a Long, Slow Trip Higher for U.S. Interest Rates

Futures show federal funds rates reaching 1.4% by late 2016

The bond market is starting to agree with Janet Yellen that rates are likely to rise gradually during the next couple of years.

Yellen, the Federal Reserve chair, said the central bank should be able to raise rates by the end of this year during her semi-annual testimony to Congress. The pace of increases will probably be gradual, she said, depending on the strength of the economy.


After initial declines, Treasuries are rallying, led by the longest maturities. Falling oil prices are reinforcing the sentiment that inflation remains below the Fed's target and making investors comfortable buying bonds.

``A slower pace could mean that their policy is going to be more accommodative than many people had anticipated initially,'' said Sean Simko, who manages $8 billion at SEI Investments Co. in Oaks, Pennsylvania. ``The Fed has made it clear that's what's most important.''

Futures prices show the federal funds rising from 0.13 percent Wednesday to about 0.50 percent by year-end and about 1.4 percent in late 2016. Fed policy makers reduced in June their median estimate for the end of 2016 to 1.625 percent, compared with 1.875 percent forecast in March.

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