A long-term rise in interest rates is only in its opening act. From Wolf Richter at wolfstreet.com:
Since September, the Fed cut by 100 basis points while the 10-year Treasury yield rose by 87 basis points! There are now doubts about further cuts.
When the Fed cut its policy rates on Wednesday by 25 basis points, it laid out a scenario of higher inflation and higher “longer-run” policy rates, and projected only two rate cuts in 2025, half the rate cuts it projected three months ago.
Then, to top it off, people who listened to Powell at the press conference walked away thinking that there might not be any rate cuts next year, that the “recalibration” phase of the Fed’s monetary policy was already finished after only 100 basis points in cuts, and that we may be on the cusp of a new phase.
As this emerged on Wednesday, the S&P 500 index tanked 3%. And the Treasury market is showing this thinking.
Short-term yields didn’t fall at all this week. The rate cut was already 100% priced in, and now there is no more rate cut priced in within the short-term window of those securities. On Friday December 13, the yields of 1 to 6 months were all at 4.30% to 4.33%. And that’s where they also ended up on Friday December 20.
And they’re now right at the Effective Federal Funds Rate (4.33% after the rate cut), which the Fed targets with its policy rates.
