With recent signals from the Fed pointing towards a December lift-off of rate hikes, treasury yields and mortgage rates have been inching higher. The expectations of a December increase, which would be the first hike in nearly a decade, have pushed the two-year treasury yield to near a five-year high while the 10-year treasury yields has climbed above 2.30% recently, for the first time since this summer.
Recent Fed chatter has leaned firmly in the camp of an upcoming rate hike with Fed District Presidents Bullard and Lacker both speaking in favor of a rate hike in recent days. Chairwoman Yellen was less direct in her speech during a Washington, D.C. policy conference on November 12th, but the balance of her recent statements have leaned towards a December lift-off.
While the Fed still has its doves, their direction may now be focused more on the eventual neutral rate of interest rather than the need to stay near zero. Chicago Fed President Evans has stated recently that even with the Fed Funds rate near zero, “the current monetary policy stance is not exceptionally stimulative.”
With the chances of a December lift-off increasing, some of the focus is shifting away from the lift-off date and towards the pace of future rate hikes. In recent speeches by New York Fed President Dudley, as well as Chairwoman Yellen, significant time has been spent making the case for a gradual increase in rates.
FOMC members are cognizant of the effect a more rapid rise, or even the expectation or a more rapid rise, could have on the U.S. economy. As a strengthening dollar can have a dampening effect on U.S. exports, and with the dollar having already appreciated around 8.5% this year against a basket of 10 major currencies, sharp increases in the dollar would certainly be unwanted.