Attention investors: U.S. interest rates may be moving up and it might happen this year.
During last Friday’s speech at the Federal Reserve’s annual economic symposium in Jackson Hole, Wyoming, Fed Chairwoman Janet Yellen signaled that a rate hike is probably coming but, as usual, she didn’t offer any specifics about the timing:
“…Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”
There’s a good chance the increase could occur during 2016. Goldman Sachs economists, cited by Bloomberg, said the subjective odds of a September rate hike increased from 30 percent to 40 percent last week. Bloomberg’s data suggests a 65 percent chance of a rate hike by December.
The U.S. bond market responded with a flattening of the yield curve. When the bond yield curve is flat, short-term and long-term bonds of similar credit quality offer investors almost the same rates. Barron’s explained: “A flattening yield curve can indicate economic weakness. It signals investors expect inflation (and interest rates) to stay low for a long time.”
Why would the yield curve flatten as the Fed raises rates? One expert told Barron’s he expects a Fed rate hike to lower inflation expectations, causing interest rates on longer-term benchmark Treasuries to move lower.
Stock investors weren’t thrilled about Yellen’s comments last week, and major U.S. indices largely finished the week lower.