![]() The odds of at least two 75-bp rate hikes (raising the federal funds rate to 3.00%-3.25%) are only 36.6%. The odds that the target will rise to at least this level by the September meeting are 100.0%, up from 84.0% last week. A 50-bp rate hike in September (after the 75-bp rate hike in July) would increase the target federal funds rate to 2.75%-3.00%. The odds suggest that the Fed will start a slow pivot at its September 20-21 meeting in which it’ll reduce the size of the rate hike from 75 bps to 50 bps. There are even small odds (9.4%) that the Fed will hike 100 bps. The odds that the July 26-27 Fed meeting will hike at least 75 bps increase from 83.2% to 100.0%. The strong June jobs report and the recognition that the Fed is serious about inflation appear to have increased the odds of larger rate hikes by later this year. Savers who are considering buying T-bills and would like to learn how best to buy them, this TipsWatch post offers many useful details on buying them at TreasuryDirect, and this The Finance Buff post offers many useful details on buying them from Fidelity, Vanguard or from Charles Schwab. At the market close today, the 3-month T-bill had a 2.22% yield, the 6-month T-bill had a 2.78% yield and the 1-year T-bill had a 3.07% yield. While the yields of Treasury notes (durations from two to ten years) don’t offer much yield advantage over top yields of direct CDs, Treasury bills (durations of one year and under) do offer a yield advantage over short-term CDs and online savings accounts. ![]() The large rise of T-bill yields does provide a good opportunity for savers to boost their cash yield. Some economists put more weight on the 10y-3m spread than the 10y-2y spread in predicting future recessions. The 10y-3m spread (the difference between the 10-year and 3-month yield) is still positive, but it has shrunk considerably. The 10y-2y spread (the difference between the 10-year and 2-year yield) fell from zero last week to -7 bps at today’s market close. The long-duration Treasury yields had more modest gains, with the 10-year yield gaining 14 bps and the 30-year gaining 8 bps in the last week.ĭue to the shorter duration yields rising more than the longer duration yields, significant yield curve inversion has occurred. The short-duration Treasury bills had the largest gains with the 1-month, 3-month and 1-year yields all gaining at least 30 bps in the last week. Treasury yields of all durations had large gains in the last week. That could put an end to rate hikes by December and a start of rate cuts in 2023. Some are predicting the return of deflationary forces by the end of 2022. The Fed could pivot faster if we do see a large and sustained decline in inflation. ![]() Long-term CD rates are unlikely to drop fast as the Fed will only slowly transition to rate cuts as the economy slows and inflation falls. That suggests savers can be patient on CDs. To avoid that mistake, “the Fed may not be able to pivot and cut rates quickly or at all” if a recession begins later this year, said Krishna Guha, vice chairman of Evercore ISI, in a recent report. Were the Fed to ease because of growth fears before inflation has been vanquished, it would risk repeating its stop-and-go tightening of the 1970s, which economists now see as a costly policy error. This WSJ piece makes the case that the Fed will avoid a quick pivot to rate cuts: The Fed is willing to risk a recession because it sees sustained inflation as a potentially greater menace-one that distorts decision-making and leads to more booms and busts. The Fed appears serious about inflation, and all signs point to the Fed hiking rates until it sees a series of inflation readings that show inflation is heading down. ![]() Friday’s strong June jobs report should keep the Fed on track to meet this expectation. Even if the actual CPI numbers fall below consensus, the Fed is widely expected to do another 75-bp rate hike at its July 26-27 meeting. The consensus is for an increase of 1.10% (MoM) and 8.80% (YoY) in the CPI and an increase of 0.60% (MoM) and 5.70% (YoY) in the Core CPI. The major economic data for this week is the June CPI that will be released Wednesday morning. Other conditions contributing to this worry include the falling oil and gold prices and a decade low in confidence among small-business owners. That inversion of the yield curve has added to the worries that the economy is heading toward a recession. Since my last Fed summary on July 5th, the 10y-2y spread (the difference between the 10-year and 2-year Treasury yields) has been negative.
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