Fed Delivers a “Hawkish Pause” Treasury Yields Spike (10 Year 4.49%)

Yesterday’s Fed decision “headline” was highly telegraphed and expected: No rate increase.  The accompanying release of Fed Economic Projections (the “Dot Plot”) indicated most of the committee sees one more rate increase this year (up to 5.6% from 5.3% today). The committee also revised their expectations of rate cuts in 2024, with an average 5.1% predicted rate for year end (as opposed to 4.6% at the June meeting). Note that committee members officials are not in total agreement: end of year 2024 predictions range from 4.6% to 5.4%.  Note that Dot Plots are not “a plan” (Powell quote) and have been off target before. Note that in 2015 when the Committee expected interest rates in 2017 to be above 3.50%, they actually were about 0.50% that year. Powell laid out the usual hawk signals at the presser. He reminded us that while price pressures have shown some encouraging signs of easing, getting inflation back down to a 2% target is far from over. The Fed has raised its expectations for GDP and lowered them for unemployment. These rosy economic forecasts indicate the Fed expects a “soft landing” (great!) therefore rates can be “higher for longer” (ugh!).  

 

Stock markets sold off as treasury yields jumped, the 10 Year Treasury jumped 20 bps this week from 4.30% to 4.49%, the highest since Oct 2007. Powell mentioned the two economic factors Fed officials are watching closely, and with some measure of surprise: tightness in the labor market (especially the services sector) and continued economic growth. He’s like a boxer that can’t believe his barrage of punches hasn’t vanquished his opponent. Today’s jobless claims report was lower than expected – this “hot” economic signal further spooked markets and contributed to today’s Treasury spike. Bottom line: The Fed sees little reason and feels no pressure to cut rates while economic/employment conditions are favorable. For investors needing to access capital, it’s the old “bad news is good news” contrarian news cycle. Today’s other economic release, LEI (Leading Economic Indicators) showed a 0.4% decline in August – the 18th month of contraction. Potential headwind “wild cards” this fall: resumption of student loan payments, UAW strike, and a likely government shutdown. Higher oil prices present a two-edged sword: higher energy prices are inflationary but also might cause consumers to pull back on other spending. Will employment slack finally appear and will a consumer “pause” contribute to disinflation? Stay tuned…

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