Federal Reserve officials have indicated that there are no immediate plans for rate cuts, causing an increase in bond yields. This news has led to a rise in the yield on the 2-year Treasury, which is now at 4.75%, up 4.5 basis points. The yield on the 10-year Treasury has also increased to 4.35%, up 2.3 basis points, while the yield on the 30-year Treasury is now at 4.47%, up 1.2 basis points. These increases in bond yields are a result of the Federal Reserve’s stance on interest rates.
Fed Gov. Lisa Cook stated in a speech delivered on Thursday that current monetary policy is restrictive. However, she emphasized the need for greater confidence in inflation converging to 2% before considering rate cuts. This indicates that the Federal Reserve is cautious about making any immediate changes to interest rates.
Fed Gov. Christopher Waller echoed this sentiment in his address on Thursday evening. While he expects monetary policy easing to begin sometime this year, he emphasized that the number of rate cuts and the timing of their implementation will depend on incoming data. This cautious approach suggests that the Federal Reserve is closely monitoring economic indicators before making any decisions regarding rate cuts.
Economists at Goldman Sachs have adjusted their predictions in line with the Federal Reserve’s stance. They now expect a total of 4 rate cuts this year, down from their previous estimate of 5 cuts. However, they still anticipate another 4 rate cuts in 2025, which would bring the federal funds rate between 3.25% to 3.5%. The Goldman economists believe that strong activity data and reduced concerns about keeping rates too high for too long have influenced the Federal Reserve’s decision.
Former U.S. Treasury Secretary Larry Summers shares a similar view to the Goldman economists. Speaking at the FII Institute in Miami, Summers stated that the next move in interest rates could actually be an increase. He highlighted the strength of the economy and the increasing evidence that inflation may not be as subdued as previously thought. While Summers acknowledges that the market expects four rate cuts, he believes this is slightly above what he anticipates.
Analysts at ING suggest that favorable data for U.S. Treasurys may not emerge until after the release of the January PCE price index, scheduled for February 29. This implies that investors will have to wait for further economic indicators before making any significant moves.
In conclusion, the Federal Reserve’s indication of no immediate plans for rate cuts has resulted in an increase in bond yields. This cautious approach is driven by the need for greater confidence in inflation converging to 2%. While economists and analysts have adjusted their predictions in line with the Federal Reserve’s stance, former U.S. Treasury Secretary Larry Summers believes that an increase in interest rates may be possible. Investors will have to wait for further data releases to determine the direction of U.S. Treasurys.
