Inflation and the Fed’s monetary policy

Jay Powell has signalled inflation is moving sustainably towards the Fed’s 2% target and that the jobs market has cooled down. Hopes for interest rate cuts are rising, but the Fed is being mislead...

The dynamics behind interest rate policy

Undoubtedly, market values everywhere are predicated on the Fed cutting rates. To a limited extent, this could become a self-fulfilling prophecy. So far, the effect on the 10-year US Treasury Note, which sets the valuation tone for all financial assets, has been to reduce its yield in recent months from 4.7% to under 4.2% currently. I have pencilled in a potential support line at 4.08% (the pecked line).

While there is little evidence that this line will provide a floor to the yield, taking it as a reference point it should be noted that an anticipated cut in interest rates in September is mostly discounted. But because Powell appears to believe that inflation is coming under control, we should question this assumption. If Powell is wrong, then at best it will be only one cut at most before the uptrend in bond yields continues.