Rate Bounce After Fed Meeting Pushes Dollar Higher and Gold Price Lower

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Although today’s Fed announcement didn’t really change anything, the financial markets continued to anticipate higher U.S. rates. The first chart shows the 5-Year Treasury Note Yield climbing close to its yearly high. The 10-Year T-Note yield also bounced. The widening spread between U.S. and foreign yields continues to support the dollar. The second chart shows the Dollar Index hitting a new recovery high. That pushed most commodity prices lower. The orange bars in the second chart shows the Gold Trust (GLD) falling to a new low.

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The third chart shows the 2-year Treasury Yield recently hitting a three-year high. Its yield of .55 is well below the 10-Year Yield of 2.60%. The two-year yield would have to climb above the 10-year to signal danger for the stock market. That’s not likely to happen for a long time. History also suggests that when the Fed does finally start to raise short-term rates, stocks usually continue to rise. Sam Stovall of Standard & Poors was quoted in Barrons over the weekend to the effect that the S&P 500 rises 2.6% on average in the six months following the first Fed rate hike, and 6.2% higher over the following 12 months.

It’s not a bad thing when rates start rising from historically low levels when that rise is being caused by a stronger economy. It can be a bad thing when rates are rising from higher levels because of a threat from rising inflation. So far, the former scenario best describes the current situation. There just aren’t any signs of rising inflation anywhere. With the rising dollar putting downside pressure on commodities, any inflation threat is being pushed further into the future. Ms. Yellen said today that the Fed won’t start rising the Fed funds rate until it believes the economy is strong enough to handle it. That will be like telling a sick patient that he’s strong enough to stop taking his medicine. That’s usually good news.

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