Optimism at the Federal Reserve as rising Treasury yields could curb inflation

Optimism at the Federal Reserve as rising Treasury yields could curb inflation

Federal Reserve policymakers are feeling optimistic that a rise in long-term Treasury yields could finally end the past 19 months of historic interest rate hikes to ease inflation.

Wall Street also hopes that there will be no further tightening in monetary policy. According to the CME FedWatch tool, the chances of another interest rate hike by the Fed in November are decreasing.

Financial markets currently see about a 90% chance that the US central bank will keep rates unchanged at its next policy meeting from October 31 to November 1. Just a month ago, the markets had this probability at only 57%.

The CME tool shows most traders are betting there will be no more hikes and the Fed will keep rates steady until June 2024 before easing policy.

Impact on American consumers.

What’s happening: US Treasury rates are very hot – 10-year Treasury yields are near their highest level since 2007. This is bad news for the economy, but these yields can act as a cushion for the Fed.

For American consumers, higher 10-year Treasury yields mean more expensive car loans, credit card rates and even student loans.

This also means more expensive mortgage rates. Mortgage rates track the yield on 10-year US Treasuries. When Treasury yields rise, mortgage rates also rise; When they go down, mortgage rates tend to go down.

US mortgage rates are at a 23-year high, and home affordability is at its lowest level since 1984.

This means consumers have started sweating. Americans have not been so worried about missing minimum loan payments since the early weeks of the pandemic, according to consumer survey data released Tuesday by the New York Federal Reserve.

The average expected probability of not making minimum debt payments in the next three months rose 1.4 percentage points in September to 12.5%, according to the Federal Reserve Bank of New York’s latest survey of consumer expectations. This is the highest rate since May 2020.

The Fed's Response and Market Implications

But what is bad for the economy is good for bringing down prices. And Fed officials signaled this week that rates are now low enough to keep inflation down to its 2% target.

Philip Jefferson, the number two official at the Fed, said in a speech on Monday that he would “remain mindful of the strengthening of financial conditions through higher bond yields and will take that into account as I assess the future path of policy.”

The Fed speaks for itself: I am paying attention to the fact that it is more expensive to borrow money, and I will take that into account when deciding what actions the Fed should take in the future.

Dallas Fed President Lori Logan also suggested on Monday that higher yields mean there may not be as much need for rate hikes in the future.

On Tuesday, Federal Reserve Bank of Atlanta President Raphael Bostic said that barring unexpected economic events, he does not see the need to raise interest rates further.

“I think our policy rates are in a restrictive enough position to get inflation down to 2%,” he said at the American Bankers Association annual conference. “I actually don’t think we need to raise rates now.”

Market Reaction and What's Next

In a twist, the prospect of a stable Fed policy excited markets and sent Treasury yields lower on Tuesday. Bonds compete with stocks for investors’ dollars, so when equities rise, yields often fall.

The 2-year Treasury yield fell to 4.96% on Tuesday, and the 10-year Treasury yield fell to 4.65%, but both are still near recent highs.

Investors will pay attention to the producer price index (PPI), which tracks the average change in prices paid by businesses to suppliers, on Wednesday and the consumer price index (CPI), a closely watched measure, on Thursday for further clues. Will keep an eye on the outgoing inflation gauge. About the Fed’s next move.

According to Refinitiv estimates, the PPI for September is expected to be unchanged at 1.6% for the year and down 0.7% versus 0.3% in August.

Meanwhile, inflation, as measured by CPI, is expected to slow month-on-month to 0.3% from 0.7% in August.

Birkenstock’s IPO

In other news, Birkenstock is making its debut on the New York Stock Exchange under the ticker symbol BIRK. The cork-soled shoemaker priced its initial public offering at $46 a share, making Birkenstock an $8.6 billion company. This is one of the largest consumer discretionary IPOs of the last 20 years, indicating confidence in the market.

Climate crisis and your beer

The climate crisis is also impacting the beer industry. Major beer producing European countries such as Germany, the Czech Republic and Slovenia are brewing hops earlier and producing less since 1994. They are also losing their important bitter component. Hop yields could decline by up to 18% by 2050, and their alpha acid content could drop by up to 31% due to hotter and drier conditions.

Heat waves and drought induced by climate change are threatening high-quality hops, which consumers love for their aroma and flavor. These hops are only grown in small areas, making them more sensitive to changing climates.

As these trends unfold, it becomes clear that economic and environmental factors are deeply interconnected, influencing everything from interest rates to the type of beer we like.

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