On Thursday, Fed Chair Jerome Powell spooked stock markets when he said that the bank is in no rush to lower interest rates. Powell cited ongoing economic growth, a strong job market, and inflation near its 2.0% target for the remarks.
Powell’s indication that rates will not fall as fast as markets like is an appropriate one. Stock markets trade at all-time highs, further pricing in regular cuts at the next series of policy meetings. Mortgage and bond markets are not surprised by the comment. Treasury bond yields rose after the Fed cut rates by 25 bps earlier this month. In addition, the latest inflation report pointed to persistently high inflation in October.
Bond traders who bet on 30-year Treasury bond prices to rise ended up with a loss of up to 11%. The 20+ Year Treasury Bond ETF (TLT) peaked at $101.64 but closed at $90.32.
The 7-10 Year Treasury Bond ETF (IEF) is down by 5.95% from its 52-week high.
The central bank is not certain what the neutral rate might be. The strong economy and Trump’s incoming administration policies in 2025 are factors for the Fed to consider. Tariffs will raise the price of goods for consumers while immigration policies will raise wage levels. Both are inflationary factors for the Fed to watch out for.