Have Rates Peaked? Fed Comments, Treasury Yields Tell Different Stories
We’ve been here before, but after Wednesday’s decision by the Federal Reserve to leave interest rates unchanged, along with comments from Fed Chairman Jerome Powell, investors are wondering anew if the policy tightening regime has peaked.
By some accounts, the latest slide in the 10-year US Treasury yield is helping tip the scale in favor of the peak-rates forecast. The benchmark rate slipped for a third day on Thursday (Nov. 2) to 4.67%, a three-week low. Two weeks earlier the 10-year rate had been trading around the 5% mark.
Analysts say that Fed Chairman Powell’s comments on Wednesday suggest the central bank may be done with rate hikes. In particular, markets focused on his observation that the recent rise in bond yields since the summer was doing the central bank’s work, which lessens and perhaps eliminates the need for additional rate hikes by the Fed.
“Powell’s comments in the presser [on Wednesday] were what everyone wanted to hear,” says Justin Burgin, vice president of equity research at Ameriprise Financial.
Fed funds futures continue to lean toward the view that the current 5.25%-to-5.50% range for the target rate will mark the top for the cycle. The market is pricing in an 80% probability that the central bank will leave rates unchanged again at the next FOMC meeting on Dec. 13.
Rates may have peaked, but the prospect of substantially lower yields in the near term is less convincing. Note that the 10-year yield in the chart above is still trading well above its 50- and 200-day moving averages. Until the trend profile reverses – the 50-day average falling below the 200-day average would be a strong indication – it’s reasonable to assume that the higher-for-longer narrative still applies.
Jean Boivin, head of
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