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By Wolf Richter for WOLF STREET.
From mid-October through the end of January, the 6-month Treasury yield had dropped by about 43 basis points, from around 5.58% to 5.15% (green box in the chart below). This means roughly, that at the end of January, the 6-month yield – a calculated composite representing securities with about six months left before they mature – saw two rate cuts within its six-month window, spread over the three FOMC rate announcements on March 20, May 1, and June 12. So roughly two rate cuts by the June meeting.
But since then, the 6-month yield has risen by 23 basis points, to 5.38% today, which is right in the middle of the Fed’s target range for the federal funds rate of 5.25% to 5.50%.
And since then, the end of its 6-month window has moved into September; so it’s now starting the process of walking away from even one rate cut by the July 31 meeting. The 6-month yield is now solidly above the current Effective Federal Funds Rate (EFFR, blue), which the Fed targets with its headline interest rate.
The FOMC’s September 17-18 meeting is already outside the six-month yield’s window, and the six-month yield is silent on it. We’ll look at the 1-year yield in a moment to get some answers.
Rate-Cut Mania began in early November and by mid-December whooshed gale-like through the markets. The federal funds futures market at one point bet on seven cuts in 2024, starting at the Fed’s January meeting, and if not in January, then with near 100% certainty at the March meeting, which is next week.
But the January rate-cut hopes were met by the FOMC’s push-back statement, followed by Powell’s push-back press conference, which was followed by lots of Fed speakers’ push-back comments, amid nasty-surprise CPI reports, PCE price index data showing the worst core services inflation in 22 years, and an increasing mess in the PPI data.
Every Fed speaker, from Powell on down had packaged any rate-cut expectations in a big-fat IF … if inflation continues to decline toward our 2% target. They all wanted to be “confident” that inflation was heading that way before cutting rates.
But inflation started turning around late last year and has been heading higher, thereby sapping the Fed’s “confidence,” instead of building it. Gradually it’s sinking in. And Rate-Cut Mania is getting dialed back.
The short-term Treasury market never bought fully into the Rate-Cut Mania that took off in the federal funds futures market, but also started pricing in some rate cuts.
The 1-year yield had dropped by 82 basis points from the peak close to 5.50% in October to 4.68% at the end of January.
Since the end of January, it has risen by 37 basis points, to 5.05% today, the highest since December 12. It is just one rate cut below the Fed’s current target range.
The Fed is now in a wait-and-see mode – waiting to see if inflation is cooling or re-heating and if the labor market is cooling or re-heating. Wait-and-see is a safe place to be at this point, with rates at 5.5% at the top of the range. Data is inconsistent and volatile, and it can go all over the place, and no one wants to make a decision on just one data point. The longer they wait, the more data points they have, and the clearer the picture gets.
Next week, following the FOMC meeting, we’ll get the Fed’s rate decision, and it won’t be a rate cut, obviously, though the federal funds futures market was nearly 100% certain two months ago that we’d get a rate cut.
And we’ll get a new Summary of Economic Projections (SEP), which the Fed releases at the meetings that are near the end of a quarter. The last one was released at the December meeting. The SEP contains the infamous “Dot Plot,” where each FOMC participant projects where they see rates to be at the end of the year. The Dot Plot is a messaging tool to communicate the status of current thinking; it’s not a commitment of any kind.
On the December Dot Plot, the median projection was three rate cuts in 2024.
Now the question is: will the median projection of rate cuts change? Will it drop to two rate cuts in 2024? We’re sitting on the edge of our collective chair.
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The post Short-Term Treasury Market Walks Away from Rate-Cut Mania, Inflation Has Upper Hand appeared first on Energy News Beat.
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