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I think the market over-reacted to the rate cut news last month. I don't think rate cuts are going to be as dramatic or frequent as was predicted, particularly now as the inflation rate ticked up, not down, a bit in December comparted to previous month.
At times, as of late, overnight treasury repo (collateralized) has traded 10 to 20 points higher than overnight fed funds.
The feds overnight repurchase program, which was as big as 2.4 trillion, is now down to about 600 billion and still dropping. Some days it drops as much as 33 billion. It could be gone in 3 to 6 weeks. The fed is using this programs liquidity, in combination with the spread in the fed funds/treasury repo rates, as a gauge of liquidity. It knows that liquidity is drying up fast.
The fed has also informally mentioned that they intend to let the BTFP expire in March. But the usage of the BTFP has not declined, and banks would want to raise capital in anticipation of that. All these things point to the early innings of a liquidity crisis, with the strong possibility of big rate cuts later in the year.
Predicting how many rate cuts in 2024 is a fools errand. There is no way to predict what will happen months out. The FED will most likely NOT cut rates unless a recession occurs. There is no reason or incentive for them to do so currently with full employment, wage gains, elevated inflation, and unaffordable housing prices. Cutting rates prematurely would be a resumption of QE and go contrary to their stated objectives. It would encourage inflation and risk asset bubbles rising again undoing much of the progress made over the past 12-18 months. The market seems to want rate cuts, but in my opinion it will only happen if bad things happen to the economy, which is also bad for markets. I suspect many of these gamblers/prognosticators betting on a half-dozen rate hikes will be very wrong.
Don't forget also that the FED is doing QT in the form of balance-sheet reduction. Since early 2022, they have reduced the balance sheet from $9 trillion down to about $7.5 trillion. They have a long way to go to get back to $4 trillion which was the pre-Covid level.
I think what they mean when they say "six rate cuts" is 1.5%. That could be three 0.5 cuts instead of six 0.25 cuts. It could all occur surrounding the election and then it can all be increased a couple months later.
Not going to happen unless unemployment ticks up massively (recession incoming / something breaks).
fed action for the most part merely confirms where investors already pulled rates .
the fed hasn’t cut a thing but bond rates have already fallen quite a bit …
when investors and the fed disagree we get the inverted yield curve like now where short term rates are higher then long term rates .
so bond rates have already fallen from their october highs.
it’s only the shortest rates that are still up there.
the ten year fell from 5% in october to the high 3% range before settling at 4% now. that is already a 20% drop in rates
After rising to 7.79% in October—the 2023 high—mortgage rates have fallen quite a bit too
The average 30-year fixed mortgage rate fell to 6.60% for the week ending January 18, according to Freddie Mac.
so no doubt rates have already fallen where investors control them despite poppa fed not lowering a thing
The rate moves you describe have mostly petered out and reversed. The FED pivot late last year is what caused yields to plummet quickly in a matter of weeks. That move is finished. Most likely those rates will settle in around current levels or perhaps rise a bit barring a recession. The FED likes the current situation even with an inverted yield curve. I don't see them cutting anytime soon.
rates have barely reversed at all..bond rates are still down 15%-20% from where they were
They are down 15-20% from the absolute peak of 5% that lasted what, about 5 minutes? The 10-year yield rose from 4% to 5% in 2 months, then fell from 5% to 3.75% in 2 months. Both moves have played out. The 10-year has since risen back above 4%. Not to say it stays here forever, but it seems the relief drop is finished. Mortgage rates fell from 7.5% to 6.5%. While every little bit helps, I don't see this moving the needle much for average home buyers or borrowers. Rates are still elevated significantly above where they were even 1 year ago.
They are down 15-20% from the absolute peak of 5% that lasted what, about 5 minutes? The 10-year yield rose from 4% to 5% in 2 months, then fell from 5% to 3.75% in 2 months. Both moves have played out. The 10-year has since risen back above 4%. Not to say it stays here forever, but it seems the relief drop is finished. Mortgage rates fell from 7.5% to 6.5%. While every little bit helps, I don't see this moving the needle much for average home buyers or borrowers. Rates are still elevated significantly above where they were even 1 year ago.
They are down 15-20% from the absolute peak of 5% that lasted what, about 5 minutes? The 10-year yield rose from 4% to 5% in 2 months, then fell from 5% to 3.75% in 2 months. Both moves have played out. The 10-year has since risen back above 4%. Not to say it stays here forever, but it seems the relief drop is finished. Mortgage rates fell from 7.5% to 6.5%. While every little bit helps, I don't see this moving the needle much for average home buyers or borrowers. Rates are still elevated significantly above where they were even 1 year ago.
the point is investors are deciding when and how much rates are falling not the fed , who hasn’t lowered a thing yet. investors pulled them lower , then backed them up a bit …by the time the fed lowers short term rates , investors will have moved the bond and note rates already
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