As expected, the Fed cut its overnight lending rate by 25 basis points. Bond yields fell slightly. What’s ahead?
Fed Statement
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/2 to 4-3/4 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
I had been waiting a bit to see the reaction of the bond market, especially the long end.
Yield on the 10-year note fell 8 to 10 basis points depending on start-end times.
A meme on Twitter had been floating for a month that the recent surge in bond yields related to increasing odds of a Trump victory.
That’s not the case. Every surge in the above chart happened on the day of strong economic news.
Why Are Bond Yields Rising?
I addressed the Trump theory on October 28 in my post Are Bond Market Yields Rising Due to a Surge in Trump’s Election Odds?
The answer is no. I go over all of the key spikes.
Competing Bond Yield Forces
- Budget deficits rate to be a disaster if Congress goes along with all of Trump’s free money handouts, tariff policy, and tax cuts. The deficit will explode.
- Deficits would have been bad had Harris won, but economists believe not as much.
- Does a Trump election stave off recession for a while or is it a case of up, up, and away?
- The third option is instant recession the moment a massive trade war starts. But is Trump just bull-mouthing or will he really place 60 percent tariffs on China and 10-20 percent on Europe.
Right now, the bond market does not like what it sees, and that can be for one of three reasons: fear of deficits (right or wrong), belief in a strong continued recovery (right or wrong), or belief in a stagflationary recession (right or wrong).
The bond bull case is that we will have a normal slowing recession, not a stagflationary one.
Democrats would sure like to blame a recession on Trump. Of course, Trump will blame Biden for the previous four years.
The bickering will continue. And neither party gives a damn about deficits.
Too many things can go wrong in multiple directions. Odds of a thread-the-needle soft landing seem small.
Gridlock and they continue to spend bonds will crash. If you substitute GDI for GDP the Buffett indicator jumps to 257.93.
As of 2024-11-07 03:19:00 PM CST (updates daily):
The Stock Market is Significantly Overvalued according to Buffett Indicator. Based on the historical ratio of total market cap over GDP (currently at 204.6%), it is likely to return -0.2% a year from this level of valuation, including dividends.
Meanwhile, based on the historical ratio of newly introduced total market cap over GDP plus Total Asset of Federal Reserve Banks (currently at 165.2%), the stock market is Significantly Overvalued, and it is likely to return 0% a year from this level of valuation, including dividends.
Barry Ritholtz finally had something to say. He’s clearly surprised, but loyal Bloombergian that he is, it can’t possibly be financial class’s fault.
As for yesterday’s quote, the key is here.
“I get that if you are in the bottom quartile, you face difficult challenges; but the bottom quartile always has a harder time.”
It’s not the bottom quartile. If a decent fraction of the $150,000 class are living paycheck to paycheck, then it’s more like the bottom three quartiles.
I need to copy that article before Barry disappears it. I still can’t believe he published something that arrogant.
It is time for a real war!
You would think that the Index Finger strain would wear out at least ONE of these two insane Parties!!??? FINGER CRAMPS!
Larger deficits mean more bonds for sale, hence higher yields. The long market is too large for fed control. The next ten year auction should be of interest.
Yes, Trump is bull-mouthing. Everyone knows that Trump loves to negotiate. He takes a preposterous position and then “settles” for a more reasonable position.
I would not be surprised if he is negotiating with Mexico right to secure the border in exchange for lower tariffs.
But won’t the fact that the Republicans now control everything mean that spending will be cut and the deficit will disappear? They are, after all, the party of fiscal responsibility. And now that they control everything (like they did the first time Trump was elected), won’t they finally use their power to do what the evil Dims never will? Actually cut spending and bring us back to a budget surplus?
You forgot the sarcasm tag. 😉
OOOPPS you beat me to it. I had not scrolled down enough.
/sarc >>>>>>> is now you tag a post here….
Per Annum Change in Real Federal Spending:
Wow Chairman Burns must be really frightened of The Donald. There is no sign that inflation is coming down, there is clearly zero sign the market is in trouble and employment is pretty much okay. So just sitting back and staring at the mess from a few thousand feet you are left with the obvious conclusion that the fed (no caps because it is looking silly now) wanted Ms Harris to win and had the 50 basis point cut to help rather than a more measured and central bank like 25 bp cut. Now they have exposed their lack of rigor, partisan position and inability to be a dependable hand at the tiller. Now they look like they are panicking with a new sheriff in town. Ridiculous! The entire statement is an exercise in double speak or “mumble swerve” and comes across to all as being a pathetic “dog ate my homework” gambit. Maybe what they are really doing is trying to ignite inflation again to harm Mr. Trumps coming Presidency. The partisan fed seems to want to blow another bubble. Sorry but nowhere on earth is this a good turn of events and no one should purchase anything beyond 2 years in maturity.
I enjoyed your musings here.
Buy gold.
Putin call Trump to congrat him. Trump + Putin vs Putin + Shi.
“What’s Ahead for Bonds?”
Bondfire of the vanities?
Inflation will rise. Wages will rise. Gov debt will be cut.
But I was told if republicans take control of everything there would be no inflation and everything would be perfect. I know, we gotta wait until January 2025, I can hardly wait for that magical place we’re all going to soon enough.
I told u already two hundred times. The real value of houses will decline.
Adjusted for inflation and seasonal factors. I’m capisce!
You are contradicting yourself, and not explaining any mechanism for currency debasement.
How, in a global deflationary depression?!
There never was any “inflation” – price rises are not inflation, they are a result of policies creating synthetic scarcity; now that those policies are on the way out, deflation is being revealed. Massive unemployment from mid-2025 is next, and in a market where there are more applicants than vacancies, wages can’t rise (unless you cound debasement of the currency and nominal rises as “rising”).
Credit has been contracting for a while now, you can only have inflation when credit is expanding; credit contraction leads to deflation, lower wages, and slowing GDP growth. Government debt can only be cut by cutting the size of the government, but in an economy where more people are clamouring for hand-outs, that’s going to be hard. Brace for 4 years of Democrats blaming Trump for the Democrat depression.
Of course, if radical cuts take place quickly, then recovery can happen much quicker.
Mish, as you have pointed out fiscal policy verses money policy. The Fed has to contend with 14.7%, 11.7%, about 6%, 5%, 6 % fiscal deficits to GDP ratios 2020 thru 2024. Who thinks that governmental fiscal tightening controlling deficit spending even to zero will result in less than a negative 3% GDP growth? Magical thinking represents the espoused policy to promote ‘business expansion’ with the purpose of the creation of GDP growth without negative deficit to GDP spending .. in a post NAFTA et.al. very entrenched service-based economy … Increased Smoot-Hawley-like tariffs … that’s a great idea to negatively affect GDP growth.The Fed is really trying … with the three month treasury minus ten year note still negative, more than two years after Oct 2022, beating the 1927 to 1929 record, There is no needle to thread … just lap and shoulder harness buckle up. Harris may end up in the envious position of not being Herbert Hoover ..
Trump/ Vance ==> Harding/ Coolidge. When Hoover is back JP will raise rates, unless we get a recession.
Actually what they have started on is to reintroduce growth by following the policies which made that growth possible in other eras.
Saw today there is movement towards using Iowa State Fair grounds as location to hold 250 year celebration of US birth in 2026. Featuring historical exhibits amongst many demonstrating where US came from.
Won’t that be a shocker for all the neo marxists when they discover what really works in getting people to better themselves by benefiting from their own Labors.
Benjamin Strong Cut rates for churchill. That sent the Dow from 200 in 1927 to 381 in 1929. The Fed split up in 1930, bc the flyover banks refused to finance GB Norman with their farmers moneys.
Hmm… bond yields are heading downwards all around the world, whatever you say.
Powell is doing his best to explain away the 50 basis cut and says data continues to warrant today’s 25 Basis. Fed action is not political is his speech.
His answers are designed that way. Data dependent as things unfold without any forward guidance.
He is not looking to have to deal with any scrutiny, over how Fed acts coming from anyone associated with incoming Trump administration.
His feathers were ruffled by question if he would resign.
JP : new leases are hardly rising, but old ones are rising to “Ketchup” with market rates. The Fed cont’ to cut rates under the sticky inflation in order to ease debt payments. When JD Vance will cut debt, following Trump policies, trust in DX will rise. DX is down today. CL up. The Fed will hike when the 10Y > 8%/10%.
Dang. Powell saying he’s not leaving even if Trump asks then says Trump better not mess with the fed governors. The Prez better not drive down a street in Dallas in a convertible.
Powell is a Federal government employee (Executive Schedule, Level I) and can be fired/replaced by the President at any time.
Powell says it’s not permitted under the law. But it doesn’t matter what the law says, no one messes with the Iron Bank.
Jimmy Carter fired two Fed Chairmen (Burns & Miller) within a span of less than two years.
JPow isn’t a Fed Chairman, he is a money god.
They can be fired when he says they say that he is fired. This is like underwear. HAINES.
BAM!
Wow what an ugly comment after two attempts on his life
Why should Trump mess with the Fed. The Fed raided your bank account in Oct 2008
and in Mar 2020 for an IOU.
Alternatively Powell could be convicted of treason and hanged by the neck until dead. Life is full of choices.
The Federal Government is already $35+ TRILLION in debt and adding a further $1 TRILLION every 100 days. This astronomical debt load cannot be serviced with short-term interest rates anywhere near 5%.
If anyone has not figured out by now that the Fed acts as a de facto fiscal agent of the US Treasury, they never will.
Intrest rate swaps are saying bond rates will go lower.
Higher yields are a result of economic data surprising up. But also there is a Trump trade element. Tuesday evening bonds started higher then dropped 3 full points as Trumps win materialized. 118-21 to 115-10 at the low yesterday. So there is a Trump element to it.
Like most things it is multiple elements
As for next year, the refinance needs of corporations is climbing and climbing and will all be at higher yields, much higher. That will represent a problem, which is why Michael Howell see a liquidity problem emerging next year
Putin will require a non-fudgable statement that NATO is NOT going to expand into Ukraine and also that the sanctions be done away with. Also if Trump can stop Israel and then the Houthis from closing the Red Sea to most traffic, there will be further normlaization of supply and downward pressure on prices next year.
IF the wars can be ended that will help inflation. As for Congress and the deficit, time will tell. Doubtful it will be worse under Trump than it would have been under Harris, except of course she would have been hamstrung by a GOP Congress.
So since September they have cut 75 bps and long rates are up at least that much. Not exactly how it’s supposed to work
The “Bond Vigilantes” are awakening out of a multi-decade hibernation.