The central bank cut interest rates by 50 basis points and yet
10-year Treasury yields, a benchmark for mortgages, actually went up.
The key question for the bond market is where rates will land once all is said and done.
The median respondent among Federal Reserve Board members and Federal Reserve Bank presidents now sees the “longer-run” federal funds rate landing at around 2.9%, up from about 2.8% in its previous quarterly update.
For years, policymakers thought that “neutral” was around 2.5% (or 0.5% in “real” terms, adjusting for inflation at 2%).
If you could raise rates from near zero to 5.25%-5.5% and still have gross domestic product expanding at around 2.5% and an unemployment rate below 4%, perhaps policy wasn’t as “restrictive” as people previously thought.
Powell: Intuitively many, many people would say we’re probably not going back to that era where there were trillions of dollars of sovereign bonds trading at negative rates, long-term bonds trading at negative rates… and it looked like the neutral rate might even be negative… It seems that’s so far away now.
My own sense is that we’re not going back to that. But you know honestly, we’re going to find out. But it feels to me that the neutral rate is probably significantly higher than it was back then.
How high is it? I just don’t think we know. Again, we only know it by its works.
My Bloomberg Opinion colleague Bill Dudley, the president of the New York Fed from 2009-2018, told me Wednesday that neutral is probably around 3% to 3.5% — and could be as high as 4%.
The upshot is that longer-term bond yields don’t have much room to fall in the near-term unless the economy weakens materially.
The developments help explain why yields on the 10-year Treasury note actually rose by five basis points after the Fed’s decision.
Jonathan Levin Bloomberg 18 september 2024
The markets decided to treat the mega cut as a disappointment.
The S&P 500 surged above its previous all-time closing high immediately after the announcement; two hours later, it ended down for the day.
Big cuts generally happen at times of great stress — most recently the pandemic and the Global Financial Crisis.
According to the Chicago Fed’s index of financial conditions, things presently are about as lenient as they get.
The last time the Fed cut this much when financial conditions were set this fair was way back in 1992
John Authers Bloomberg 19 september 2024
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