The Federal Reserve announces it intended monetary policy dictum at 2:00. The markets are expecting a “hawkish cut” of 0.25% bringing the overnight target rate to a range of 4.25% to 4.5%.
There are several bulge bracket firms that suggest the 10-year Treasury will yield between 5% and 6% in the intermediate future, the result of budget deficits and persistent inflation.
According to the St. Louis Fed, the average post WWII average inflation rate and 10-year Treasury yield is 3.5% and 5.46%, respectively.
Inflation today is around 3.5% and the 10-year is yielding around 4.4% thus suggesting that either the 10-year must rise in yield or the inflation rate must fall.
Most believe inflation will continue to fall but as widely discussed it has been stuck at current levels for a considerable period of time.
And then there is deficit and interest coverage on the debt. Interest on the national debt is over $1 trillion or about 17% of the federal budget. This is up considerably from around $350 billion about five years ago, the result of rising interest rates and spendthrift government policies.
Treasury debt outstanding has swelled from about $22 trillion at the end of 2019 to over $35 trillion today.
According to the Treasury Department, the weighted average interest rate on the outstanding debt is around 3.3%. This is a 15-year high but is still well below the Treasury now has to pay to sell in its debt with all maturities yielding over 4%.
Bloomberg writes approximately 24% of Treasury debt matures in one year or less, “a share considerably higher than recommend levels and recent standards.”
Writing the obvious, Washington has ignored warnings from budget experts and “for years” has set fiscal discipline aside for another time.
Perhaps Bloomberg wrote it appropriately that the Trump Administration “will be inheriting a trajectory for federal borrowing that is far worse than of his modern-day predecessors, perhaps facing a currency fiasco such as the one the British Pound or Japanese Yen had faced.”
Inflation and interest rates do matter. Government cannot tax its way out of today’s environment. Spending cuts and moderate inflationary growth is perhaps the correct prescription, partially mirroring today’s Boomflation economy ex massive government spending.
Commenting on yesterday’s market action, the bifurcation between growth and value has come back with a vengeance. The Dow has declined for nine consecutive days, the longest losing streak since 1978 according to CNBC. As widely noted, the NASDAQ is surging with some suggesting that some of its largest members are in “bubble territory.”
Treasuries were relatively unchanged.
Last night the foreign markets were up. London was up 0.07%, Paris up 0.22% and Frankfurt up 0.26%. China was up 0.62%, Japan down 0.72% and Hang Seng up 0.83%.
Futures are up about 0.25% ahead of the outcome of the Fed meeting. The 10-year is off 7/32 to yield 4.42%.