The Fed Cuts Key Interest Rate By A Quarter-Point, What’s Ahead For Bonds? -

The Fed Cuts Key Interest Rate By A Quarter-Point, What’s Ahead For Bonds?

Nov 07, 2024Jeremy ParkinsonFinance0

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.More By This Author:The German Government Collapses, Chancellor Scholz Fired his Finance MinisterModels Vs Humans: Models Can’t Think, But People Think About The Wrong Things The Brookings Institute Wonders Why Consumer Sentiment is So Bad, I Can Help