Last week’s big story was the Fed pouring cold water on the hope that tight money was over and easing was imminent. Instead, the markets got “higher for longer”, with interest rates near today’s debilitating levels projected all the way through 2024.
(Reuters) - Benchmark 10-year U.S. Treasury yields rose to 16-year highs on Thursday, a day after the Federal Reserve surprised investors by flagging the potential for an additional rate hike, and an expectation for fewer cuts next year.
The U.S. central bank held interest rates steady, as was widely expected, and said that its benchmark overnight interest rate may still be lifted one more time this year to a peak 5.50%-5.75% range.
It also now expects half a percentage point of rate cuts in 2024. As of June, Fed officials had expected to cut rates by a full percentage point next year.
"It caught the markets by surprise because there was this sense that three months of encouraging inflation data would kind of bring down the temperature at the Fed," said Will Compernolle, macro strategist at FHN Financial in New York.
"But, for a number of reasons, they still feel like they need to stay hawkish - they need to stay very ready to continue to be restrictive," Compernolle added.
Fed chairman Jerome Powell on Wednesday said that a "solid" economy with still "strong" job growth will allow the central bank to keep that additional pressure on financial conditions through 2025 with much less of a cost to the economy and labor market than in previous U.S. inflation battles.
He added that "we want to see convincing evidence really, that we have reached the appropriate level" of interest rates to return inflation to the Fed's 2% target.
The reason for the Fed’s “hawkish pause” can be summed up in two words: “wage inflation.” American workers have regained the power to demand more money and are taking full advantage. Just last week, the United Auto Workers union struck the big three US automakers, which will no doubt end with a big wage/pension package. Other unions are watching with interest.
The Fed is terrified of rising wages and will take extreme steps to keep increases in the low single digits. See here for more details.
