- The yield on the 2-year Treasury (BX:TMUBMUSD02Y) remained steady at 4.965%.
- The yield on the 10-year Treasury (BX:TMUBMUSD10Y) increased by 3.1 basis points to 4.287%.
- The yield on the 30-year Treasury (BX:TMUBMUSD30Y) rose by 5 basis points to 4.406%.
What’s Driving Markets
On Thursday, important updates on the U.S. economy will be released, including the weekly initial jobless claims and the August Philadelphia Fed manufacturing survey, both scheduled for 8:30 a.m. Eastern Time. Additionally, the leading economic indicators report will be released at 10 a.m.
These reports will provide the Federal Reserve with more data to consider as they contemplate whether to continue raising interest rates. Their goal is to combat inflation, which although it has recently decreased, still remains above the central bank’s target of 2%.
The minutes of the Fed’s July monetary policy meeting, released on Wednesday, indicate that they are cautious about ending the tightening process in fear that inflation might persist at high levels. Recent indicators such as better-than-expected July retail sales suggest that the economy has adapted well to the Fed’s measures.
Furthermore, on Thursday, the yield on 10-year Treasuries briefly surpassed 4.31%, marking the highest level since the 2008 global financial crisis.
Fed Expected to Hold Interest Rates Steady
According to the CME FedWatch tool, markets are currently indicating an 87% chance that the Federal Reserve will keep interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on Sept. 20.
There is a 35% probability of a 25 basis point rate hike in November, which would bring the range up to 5.50% to 5.75%. However, the central bank is not anticipated to lower its Fed funds rate target back to approximately 5% until June 2024, as stated by the 30-day Fed Funds futures.
Steven Blitz, chief U.S. economist at research firm GlobalData, believes that the Federal Reserve is currently focused on managing the risk of unintentionally tightening policy too much versus the cost of insufficient tightening. He acknowledges that it is challenging for the Fed, or any monetary policy, to precisely manage the economy. Blitz maintains his view that the economy is heading into a recession, aided by capital market price shifts. He suggests that the Fed will only consider easing when the unemployment rate reaches 4%.
Blitz concludes his note by mentioning that if there is no recession by autumn, it wouldn’t be surprising to see a funds rate of 6.5% and a 10-year U.S. Treasury yield of 6% sometime next year. He warns that although the Fed’s plan may unfold as expected, there is still a possibility of reacceleration in the economy that could lead to upward inflationary pressure.