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NEW YORK – That interest rates are going to rise at some point is obvious. The only uncertainties are over when and by how much. And the various people at the Federal Reserve have been trying to prepare us for the next, coming, rise by telling us the conditions under which one will occur and then gently pointing out that those conditions are being met. So, we’ve had Janet Yellen telling us that economic conditions are improving and so on. And now we’ve got James Bullard telling us that the markets all seem nicely braced for a rise. Of course, Yellen wouldn’t be raising rates if economic conditions were not improving, Bullard wouldn’t advocate a rate rise if the markets were not braced. In fact, given all the briefing that’s been going on the Fed would probably think that they’d failed in their job if the markets weren’t currently expecting and thus prepared for a rise.

The head of the US Federal Reserve said on Friday that a rate rise would probably be appropriate in “coming months” if the US economy continued to improve, in the strongest signal yet that the central bank could tighten monetary policy this summer.

Speaking at Harvard University, Ms Yellen, the Fed chair, became the latest policymaker to point to improving economic conditions in the US as laying the case for a potential rate rise.

To add to this we’ve got Bullard:

St. Louis Federal Reserve President James Bullard said on Monday global markets appear to be “well-prepared” for a summer interest rate hike from the Fed, although he did not specify a date for the policy move.

“My sense is that markets are well-prepared for a possible rate increase globally, and that this is not too surprising given our liftoff from December and the policy of the committee which has been to try to normalize rates slowly and gradually over time,” Bullard told a news conference after speaking at an academic conference in Seoul.

“So my ideal is that if all goes well this will come off very smoothly.”

“Very smoothly” here should be interpreted as “markets don’t move an inch on the announcement”. Now obviously that won’t be quite true but Bullard and the Fed are here hoping that it will be about true. Which brings us back to that efficient markets theory. Recall, all that says is that markets are efficient at processing information. Thus it is only new information that moves prices in markets. We might think that the Federal Reserve raising rates is new information but not so much really. Because they’ve been leaping up and down, shouting Yahoo and telling everyone that a rate rise is about to arrive. Sure, they’ve not actually dealt insider information, telling people which day and how much the rise is going to be. But they’ve made it as obvious as they can without quite actually doing that.

All of which will be an interesting little test of that EMH actually. When the rise is announced, what happens to bond prices? If they stay about where they are then the EMH is true: everyone expected the rise, the rise was already in prices. Not often we can test an economic theory directly so why not when we can? – Forbes.