Ben Emons, Columnist

The One Yield Curve That Should Concern Powell

Overnight index swaps suggest the economy will be weak enough a year from now to warrant rate cuts.

November 13, 2017 at 11:30 AM UTC

Ben Emons is the founder of FedWatch Advisors, a firm specialized in analysis and investing around the Fed. Previously he was associated with NewEdge Wealth as head of fixed income and Medley Global Advisors as Managing Director of Global Macro Strategy. The opinions expressed are his own.

Does Jerome Powell know what he's in for?
Photographer: Olivier Douliery

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Since U.S. President Donald Trump nominated Jerome Powell to be the next Chair of the Federal Reserve, the debate among economists has mainly centered on whether he will continue the central bank's plan to raise interest rates at a gradual pace. Maybe they should take a close look at the bond market, which is signaling that Powell may need to take monetary policy in a direction almost no economist expects.

By just about any measure, the U.S. economy is humming. Gross domestic product expanded at a 3 percent or better rate in each of the past two quarters, the first time that has happened since 2014. At 4.1 percent, the unemployment rate is the lowest since 2000. Corporate earnings are rising at healthy clip and consumer confidence is soaring. Against that backdrop, it's not too surprising that bond traders boosted the probability of a Fed rate hike in December and March by about 10 percentage points since Powell's nomination.

Probability of Fed Rate Hike in 2017, 2018 and 2019