Although we are still squinting towards the horizon to see the eventual rate increase from the FOMC, the market is definitely telling us that we have shifted from "ZIRP Forever!" to "ZIRP for a couple more years!" A subtle shift, but a meaningful one nonetheless. We can see the evidence in the belly of the yield curve, with volatility arriving first in the 5 year area and now in the 3 year (chart via US Department of the Treasury):
As you can see, the 3 year yield has been rising steadily since the spring of 2013. (And as an aside, isn't it really hard to fathom the 3 year yielding 5% again?)
Since the timing of the rate increase is slowly gaining clarity, I thought this post from Sober Look (More clarity from the FOMC on the mechanics of liftoff) would be helpful. The post is short and worth the read, but here is a quick snippet:
The latest FOMC minutes provided some clarification on the approach the Fed is expected to take as it begins normalizing short term rates in the US. Here is a quick overview of the Fed's strategy and potential implications.
The Fed has chosen the interest rate on excess reserves (IOER) as the primary tool to control interest rates during the normalization process. While working with IOER is certainly more effective than the Fed Funds rate, there are a some drawbacks.
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