Market ignoring Janet Yellen's possible rate hike in 2015

With the economy growing and Fed Chair Janet Yellen poised to raise interest rates, calls for higher yields are the most aggressive since 2009, when U.S. debt securities suffered record losses, according to data compiled by Bloomberg.

Next year should be the break-out year finally,” a financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., said. “The market is ignoring the rhetoric that Yellen and the FOMC is getting closer and closer to tightening. The market has it wrong.”

Interest rate hike might not happen in 2015

Last week, the Federal Reserve made its last monetary policy announcement of the year, removing the phrase "considerable time" and replacing this with "patient."

Regarding the labor market, Janet Yellen said that overall the labor market has improved, and noted that underutilization of labor resources continuing to diminish. 

On the broader economy, Yellen said that real GDP expanded 2.5% over the four quarters ending in the third quarter, with indications showing the economy continues to grow at that pace. 

Yellen noted that the decline in oil prices "will likely hold down overall inflation in the near term." Yellen added that "as oil price declines and other transitory factors dissipate" the Fed expects inflation to move back towards its 2% target.

The Fed has noted the decline in the "market based" measures of inflation — i.e. breakevens — and said these too look transitory, though these do bear close watching. 

Yellen said that the Committee expects it will be appropriate to maintain its current policy stance "for at least the next couple of meetings."

Yellen said that most FOMC members, however, believe that it will be appropriate to begin raising rates at some time in 2015, but that the time of year depends on the economic situation.

At the time of lift off, FOMC members expect to see a further decline in the unemployment rate, with "core" inflation running near current levels, but remain confident that inflation will run back to target levels.

Yellen still maintains the view that interest rate hikes will continue to depend on incoming data.

"Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy."

Unlikely for rate increase until mid 2015

Federal Reserve Chairwoman Janet Yellen recently ruled out an increase in interest rates until April 2015 at the earliest.

Yellen said Fed policy makers thought it was “unlikely” the economy would show enough vigor to justify the first rate increase since 2006 “for at least the next couple of meetings.”

Asked how many meetings equals a couple, Yellen was emphatic: two.

The Fed’s next meeting is in late January. After that, the Fed does not meet again until March 17-18.

The third meeting of the year takes place April 28-29, with another strategy session in June.

Of course, the Fed could always rates earlier if the economy grows strong enough. But it appears the central bank really is prepared to be “patient” as its latest statement suggests.

And once the Fed does begin to raise rates, Yellen and her colleagues think they will move a bit slower than they previously expected.

Janet Yellen expecting to face more political pressure next year

As Federal Reserve Chair Janet Yellen begins the delicate process of deciding when and how to raise interest rates without stifling the economy, she is facing sharp new pressures from both sides of the congressional aisle. Republican leaders say they plan to use their new dominance on both sides of Capitol Hill next year to target the Fed for much greater scrutiny, including aggressive hearings and possible passage of bills to drag the central bank’s secretive policymaking process out into the open.

“Their new aggressiveness is increasingly alarming to current and former Fed officials, who say they are concerned about the institution’s historic independence from political pressure, particularly at a time of persistent dysfunction in fiscal policymaking on Capitol Hill.

All of this pressure will come as Yellen, in her first full year in the job, attempts to shift Fed policy away from crisis mode without wrecking the global economy. Moving too aggressively to raise interest rates could drive the country back into recession, while moving too slowly risks a disastrous spike in inflation.

“‘She faces the enormous risk of being the one who has to say ‘Well, I’m sorry, we did what we thought was best, but the economy went to hell in a handbasket, anyway,’; said Bob Eisenbeis, chief monetary economist at Cumberland Advisors. ‘And she will face pretty much constant harassment from politicians on all sides.’ This harassment — defenders would call it robust oversight — will come largely from Republicans who believe they have a mandate to expose the inner workings of one of the world’s most important economic decision-making bodies.