By Brian Beaulieu — ITR Economics — Oct 10, 2024
Despite the Federal Reserve’s 50 bps decline in the Federal Funds Rate in September, the inverse yield curve remains in place when using the traditional approach of comparing the US 10-Year Government Bond Yield to the Fed Funds Rate. In normal times, short-term rates like the Fed Funds Rate should be lower than the 10-year rate because the latter comes with more risk. Why is the inversion still in place using this measure? Because the market priced in a larger interest rate decline for the 10-year bond relative to the Fed’s 50 bps decline. The Fed is still behind the curve relative to the marketplace.
The chart below illustrates that the Fed Funds Rate is 92 bps “too high” relative to market pricing on the long bond yield. Prior to the current FOMC, the Fed would take its cues from the marketplace. Historically, we would infer from the chart that the Fed will be dropping rates another 100 bps from here. We think it best if you do not count on such largesse from this Fed.