Stocks rallied to new heights and bond yields fell Wednesday on the back of Federal Reserve Chair Janet Yellen’s testimony before Congress.
Now, some strategists see interest rate hikes pushed back slightly later in the year as Yellen took on a tone more dovish than was expected. And that might be welcome news for stocks.
Specifically, Yellen said interest rates likely do not need to rise much further to achieve the central bank’s goals around monetary policy.
“Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance,” Yellen said in prepared remarks, though still pointing to higher rates in the short term.
“Because we also anticipate that the factors that are currently holding down the neutral rate will diminish somewhat over time, additional gradual rate hikes are likely to be appropriate over the next few years to sustain the economic expansion and return inflation to our 2 percent goal,” she said.
As a result of this rhetoric, along with some of Yellen’s language regarding the central bank’s balance sheet, the Federal Reserve will likely begin winding down its $4.5 trillion balance sheet in September, rather than in July, according to Goldman Sachs economists.
In a note to clients Wednesday afternoon, the Goldman team, led by chief economist Jan Hatzius, wrote that the Fed is now slightly more likely to hike its federal funds target rate in December, at a 55 percent chance, versus 50 percent previously. Furthermore, the probability of a September rate hike has fallen to a mere 10 percent.
It is clear that the path to raising rates by year’s end is still on, though it’s going to occur “in a very gradual fashion, which is why the markets reacted so positively to her testimony,” said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management.
In fact, the path in tightening will be relatively “benign” for the consumer, Schlossberg said, as it’s going to be relatively gradual and will not come down very hard on the housing auto markets.
“One of the interesting things about the current Fed rate-tightening cycle is just how widely spaced it is,” Schlossberg said Wednesday on CNBC’s “Trading Nation.” “Generally — historically — the Fed used to raise rates once a quarter, sometimes even once a month. Now, we’re at a pace to do, maybe, once every six months. And sometimes even once every nine months.
“So these very wide gaps suggest a very gradual tightening, which is another reason why the markets are much less concerned about the Fed rate hikes now,” he said.
Indeed, the Dow Jones industrial average hit its 24th all-time intraday high of the year and technology stocks posted gains following Yellen’s testimony.
This action in technology stocks suggests that the market is “not really concerned about interest rates affecting capital spending, because interest rates are going up at a very slow, gradual pace and the Fed’s communication today was that credit is going to stay relatively abundant for the foreseeable future,” Schlossberg said.