There is strongly divided opinion on whether the Fed’s decision to raise 25 bps this week was the right thing to do. What should the Fed prioritize? Financial stability or prices of goods and services? The Fed chose the latter. However, Powell added he does not see rate cuts in his base case for 2023. However, that’s not what bonds are pricing in. They see the Fed cutting rates by a further 100 bps this year. A reckoning is coming… one of them has it wrong.
"Interest Rates / Bonds"
The Fed Must ‘Choose their Poison’
The collapse of SVB and tightening financial conditions has put the Fed in a very difficult spot. For example, prior to the collapse they had a green light to raise at least 25 bps. Not now. Tightening rates could cause further pressure in the banking sector. However, if they choose not to – what signal does that send. There are no easy choices…
Powell’s Punch
In what was supposed to be a ‘vanilla’ testimony to Congress – Jay Powell turned this into a market moving event. Not pleased with how market participants interpreted his previous address – he set the record straight that rates will be higher for longer. His testimony left no room for ambiguity – it was full hawk. Markets quickly revised their forecasts for the peak Fed funds rate – with some now thinking 6.00%. What’s more, the 2/10 yield curve is now negative 107 basis points. We have not seen that since 1981. Soft landing? Good luck.
10-Year Yields Continue to Rise… Why this Matters
The bond market has connected the dots – rates are likely to stay higher for a lot longer. This has seen yields all along the curve surge… with the 10-year now back above 4.0%. The 2-year has moved 100 bps in just 4 weeks. This has implications for stocks and their valuations… none of it great. Look for the 10-year to push higher – perhaps to 4.4% – which represents opportunity for investors.
For a full list of posts from 2017…