End of Rising Interest Rates in Sight as Treasury Yields Surge
The Federal Reserve policymakers are increasingly optimistic that the surge in long-term Treasury yields might signal the end of the prolonged period of historic interest rate hikes, which were implemented to curb inflation over the past 19 months.
Wall Street shares this optimism, anticipating a halt in further monetary policy tightening. Current predictions, as per the CME FedWatch Tool, indicate a declining likelihood of another interest rate increase by the Fed in November. Financial markets now foresee a nearly 90% probability that the central bank will maintain the current rates in its upcoming policy meeting at the end of October. This is a significant shift from just a month ago when the odds were pegged at 57%.
Traders predominantly expect the Fed to maintain the status quo on rates until June 2024, after which they anticipate a policy relaxation.
Why It Matters: The soaring US Treasury rates, with 10-year Treasury yields nearing their peak since 2007, have implications for the broader economy. Elevated Treasury returns translate to higher costs for consumers in terms of car loans, credit card rates, student debt, and notably, mortgage rates. With US mortgage rates at a 23-year high, housing affordability is at its most challenging since 1984.
This financial strain is evident in consumer sentiments. Data from the New York Federal Reserve indicates that Americans' concerns about defaulting on minimum debt payments are at their highest since the early pandemic days in May 2020.
However, the silver lining is that economic downturns can lead to price reductions. Some officials at the Fed believe that the current rates are sufficient to bring inflation down to their 2% target. Philip Jefferson, the Fed's deputy official, and Dallas Fed President Lorie Logan both hinted that the elevated yields might reduce the need for future rate hikes. Similarly, Raphael Bostic, President of the Federal Reserve Bank of Atlanta, expressed skepticism about further rate hikes, given the current economic conditions.
Market Response: Interestingly, the markets responded positively to the potential stability in Fed policy, leading to a dip in Treasury yields on Tuesday. As bonds and stocks vie for investor attention, a rise in equities often corresponds to a drop in yields.
Looking Ahead: Investors are keenly awaiting the release of the Producer Price Index (PPI) and the Consumer Price Index (CPI) this week. These indices will offer insights into the Fed's potential next steps. The September PPI is projected to remain steady year-on-year at 1.6%, while the CPI for September is anticipated to show a month-over-month slowdown.