10-year Treasury yield back to 2.87% as market decides wage inflation isn’t likely to push the Fed to three rate increases in 2018

Traders and investors decided today that the Federal Reserve’s semiannual monetary policy report to Congress is wrong and that Wall Street’s own seers are right about wage-driven inflation.

The Fed’s report, delivered to Congress today, makes it clear that the bank sees the labor market at or beyond full employment.

On the other hand, Wall Street strategists keep saying, It’s different this time. The latest example comes today from Prakash Melanie, the chief investment officer for Blackstone’s private equity business, who told Bloomberg, “This cycle actually is different.” Because of tax reform, technology-driven efficiencies, and corporate confidence, he said, he’s more comfortable paying higher prices in his deals.

In addition, “Technology makes our operating businesses more efficient; therefore multiples change,” he said. “It’s one of the big tailwinds right now to the corporate sector and to private equity if you can implement it well.”

Today, it’s Wall Street’s view that has the upper hand in the financial markets. The yield on the 10-year note has dropped back five basis points to 2.87% (as bond prices rise.) That’s about where yields were when the week started.

The new Fed chair Jerome Powell is schedule to testify before Congress next week on the state of the U.S. economy. At the moment the market consensus is looking for only two rate increases in 2018. Let’s see if Powell’s appearance changes any minds.

In the short term (that is, for the weeks until the Fed’s March 21 meeting) I don’t think Powell’s comments matter. The CME FedWatch tool puts the odds of a rate increase at the March 21 meeting at 83.1% today, up from 81.7% yesterday. The words that could move the market are the comments from the Fed after that meeting that might point to the timing of the next interest rate increase.