The Federal Reserve raised rates last week for just the sixth time since the financial crisis and the markets took it in stride. However, one market watcher says the Fed’s slow pace borders on ridiculous.
“It’s at such a glacial pace, it’s hilarious,” Bryce Doty, senior portfolio manager of fixed income at Sit Investment Associates, told CNBC’s “Futures Now” recently. “It’s almost like arguing who can whisper the loudest.”
On Wednesday, the central bank announced a 25-basis-point increase to the fed funds rate. Its target range of 1.5 percent to 1.75 percent is still below pre-recession levels, a level that Doty derided.
“It’s not really getting them to where they want to be,” Doty continued. “They want to be at a neutral rate which is 3 percent and they’re at a pace that’s going to take them as long as two years to get there. It seems a little silly.”
The Fed has been working to normalize monetary policy over the past two years, beginning with its initial move off historically low, near-zero rates in December 2015. Since then, it has raised rates in incremental 25-basis-point moves, and begun to slowly wind down a balance sheet that exceeds $4 trillion.
By the Fed’s own testimony, the U.S. economy is strong and the labor market tight, two conditions that do not warrant stimulative policy, Doty aid. In a statement Wednesday, Fed Chair Jerome Powell and his colleagues said that the economic outlook had “strengthened in recent months” and that activity should expand at a “moderate pace.”
In updated forecasts, the Fed said it expects the U.S. economy to grow at a 2.7 percent rate in 2018, 2.4 percent in 2019, and 2 percent in 2020. Each year’s forecasts were revised higher.
“It’s surprising that their GDP forecast is about the same as what our growth rate was in 2014, 2015,” said Doty. “Yet we’re in a completely different environment and they described it as such as employment’s strong and a lot of tailwinds. So, to us as a bond manager, that means rates are going up.”
Inflation – one of the Fed’s dual mandates – has been a major hurdle to a faster pace of hiking rates. Prices have been slow to rise, and wage growth stagnant for several years, though both began to show signs of life in recent months.
If the Fed doesn’t fasten its pace, those inflation pressures could accelerate and cause an economic headache, Doty added.
“If they don’t raise rates by enough then you have the inflation fears that might rear their ugly head. I believe that if the Fed is too glacial, too slow, the bond market vigilantes … will just take over and start to push rates up higher on their own,” he said.
The yield on 10-year Treasury bond is hovering near its highest levels in four years. The 10-year held around 2.83 percent on Friday, but declined on Thursday after Powell sounded less hawkish than anticipated. Bond prices move inversely of interest rates.
Doty said he and his firm are shorting Treasury futures, or adding bets that bond prices will fall. He notes that rates are on the rise, and that risks are “definitely to the upside.”
The 10-year yield spiked to a year-to-date high of 2.937 percent on Feb. 21, a level not seen since 2014.
