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Fed officials discussed concerns about how President-elect Donald Trump’s policies could affect the central bank’s efforts to return inflation to its 2% target. Investors are concerned that interest rates will continue to rise for a long time and are rapidly adjusting their interest rate expectations for 2025. .
Federal Reserve Chairman Jerome Powell speaks at a 2024 press conference.
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important facts
Minutes of the Fed’s hawkish Dec. 18 policy-making Federal Open Market Committee meeting, released Wednesday afternoon, revealed the root of the Fed staff’s silence: impending changes in Washington.
“The impact of potential changes in trade and immigration policy suggested that restoring inflation to 2% “may take longer than previously expected,” the minutes said.
“Nearly all” Fed officials “have determined that upside risks to the inflation outlook have increased,” the release said.
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., told clients previewing the release of the minutes that President Trump’s “policy mix is likely to be somewhat inflationary, leaving less room for the Fed to cut interest rates.” I predicted it in my notes.
tangent
The Fed is already expected to cut rates one more time in 2025, at least according to derivatives market data tracked by CME Group’s FedWatch tool, with a single rate cut of 0.25 percentage point to a target range of 4% to 4.25%. indicates the highest possibility. scenario until the end of the year. That’s a far cry from the sub-2.5% interest rates set from 2009 to 2021, during the Great Recession and the coronavirus-induced inflation turmoil. This was also a notable shift from the 3.5% to 3.75% range priced in a month ago, as resurgent inflation concerns similarly upended expectations for more accommodative monetary policy for borrowers and equity valuations. It is also a readjustment. Also showing that optimism about rate cuts is fading is the turmoil in highly correlated bond markets. The 10-year Treasury yield rose to 4.7% on Wednesday, its highest level since April. That’s more than a percentage point higher than when the Fed began its rate-cutting cycle in September, bucking conventional wisdom that easing tight monetary policy is likely to lead to lower bond yields. Rising yields indicate that investors are less willing to hold government bonds, which are loans used to finance government operations, and indicate less confidence in the federal government’s fiscal health. .
Main background
Although the Fed only officially determines the target federal funds rate (the extent to which financial institutions can lend their reserves to each other in overnight transactions), the Fed’s interest rate decisions have a large impact on borrowing costs for the entire economy. give. After rapidly raising interest rates in 2022 and 2023 as the U.S. suffered its worst inflation in 40 years, the Fed cut interest rates for the first time in 4-1/2 years last September, bringing rates to 5.25%. The rate was lowered from ~5.5% to 4.75~5%. From there, higher-than-expected monthly inflation rates, worries about prolonged consumer price increases due to tariffs, and an unmanageable national debt of $36 trillion led to plans to return monetary policy to neutral. Things did not go exactly as planned due to various obstacles.
Mortgage interest rates continue to rise
The jump in yields has been a challenge for borrowers because the 10-year is used as a benchmark for many loans, including mortgages. In fact, the average interest rate on a 30-year mortgage rose to 6.99% last week, up from the average mortgage rate of 6.1% in mid-September and the highest in six months, according to Mortgage Bankers Association data released Wednesday. It became the standard.
important quotes
Thorsten Slok, chief economist at asset management firm Apollo, told Bloomberg on Tuesday that the likelihood of a stock market correction due to monetary and fiscal policy uncertainty is “much higher” than currently priced in. . “These are a number of effects that remind us of 2022, when rising interest rates and falling stock prices coincided,” Slok continued. By 2022, it will be 19%, the worst year since 2008. The stock market isn’t too red this time around, but the S&P is down more than 3% from its all-time high last month, and that decline is at least partially due to: Policy concerns.
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