(Bloomberg Gadfly) — The Federal Reserve is getting closer to making a policy error.
That’s the message bond traders sent on Wednesday when the Fed raised overnight borrowing costs for the second time this year. That was widely expected. What was less anticipated was the signal from U.S. policy makers that they still plan on an additional interest-rate increase this year despite relatively weak economic data of late. At the same time, the Fed gave more details about its plan to start unwinding its behemoth balance sheet later in 2017.
All these moves are aimed at increasing borrowing costs to bring them more in line with historical norms. In the past, the Fed tightened monetary policies to slow growth and tamp down inflation, but that’s not what’s going on here. Instead, U.S. central bankers are clearly worried about easy-money policies fueling a seemingly endless rally in riskier assets and the paucity of ammunition to lower rates the next time the economy sours.
But the bond market’s response showed that the Fed is neither boosting longer-term benchmark borrowing costs nor dampening appetite for riskier assets. Yields on 10-year and 30-year Treasuries plunged after several measures of expected inflation and growth over the longer term fell, and they ended the day lower after the Fed’s announcement.