A December Federal funds rate increase to the 1.25%- 1.50% range is warranted given upbeat third quarter
economic performance with the GDP annualized growth rate revised upward to 3.3% and unemployment at a 17 year low.
Fedspeak is aligned with forecasts and market expectations: “I think the case for raising rates at our next meeting is
coming together” Powell, Fed Chair nominee, Senate hearing, November 28, 2017 “We continue to expect that gradual increases in the federal funds rate will be appropriate” Yellen, Fed Chair, Congressional testimony, November 29, 2017
Fed funds futures are fully pricing in a December rate hike, along with an implied probability of 60% for a subsequent hike in March 2018.
10-Year Treasury note volatility has dropped to a newhistoric low.
Downward pressure on long-term yield term premium remained and duration-risk compression has crossed over
into negative territory.
The baseline is for a gradual increase in long-term yields with the yield curve slope flattening by an additional 20 basis points.