The other day the market was sticking with a 25% probability of a Fed tightening when Yellen and Poole came out and said they were 50/50. Today we got the Beckner underscore of the same point -- the odds of a 25bp tightening is closer to 50/50 than the market seems to be thinking.
Beckner also made the point that I discussed in my "White Knuckle" post -- is this the time where the Fed trusts its forecast and stops or they don't have the trust and tighten for insurance. Given what Poole and Yellen said, Bernanke has only a 50% confidence in their model's outlook. Hence the need for anecdotal info, etc. (see my previous blog).
Judging from how the market is priced, even if the Fed stops there is little upside for coupon securities. If the Fed stops and the market starts pricing in an ease for early next year, the two-year rallies about 7 bp. On the other hand, if the Fed tightens in August and then the market assumes no increases going forward (only likely in retrospect not likely in expectational terms) the 2-year would move back almost 20bp.
My own opinion is still that they skip, but the point is that unless there is the sudden belief that the economy is going to slip into recession, the upside is essentially priced in. And as far as the recession talk is concerned, it may or may not happen but it won't be because the funds rate is 5.25% or 5.50%. Remember, this economy goes into recession when the credit creation process comes to a halt, and we are far from that point.