Powell's Dilemma

The Federal Reserve raised the short-term Fed Funds rate by 0.25% to 1.75%-2.00% yesterday evening, as expected and to little fanfare. Long duration bonds rallied a little into the close of trading while equities declined marginally. The ECB is up next and Mario Draghi will today outline his plans for the potential partial removal of monetary support to European markets. It will be interesting to see how far he gets with that plan.

Fed Chairman Jerome Powell desperately wants to raise (short-term) interest rates but he is hesitant to increase faster than the market is anticipating for fear that he will invert the yield curve. Inverted yield curves (when 2 year yields > 10 year yields) are a precursor to recession. Today, 2 year yields in the US have surged to 2.59%, up from just 0.60% 24 months ago, while 10-year yields have reached 2.98%. The spread between 2 and 10-year yields has narrowed to just 39 basis points. 

 
 

Inflation in the US has started to rise, the labour market is tight, wage costs are increasing and corporate earnings are reaching new highs, yet Powell is still reluctant to raise short-term interest rates in any meaningful way. The bond market is calling Powell's bluff and the yield curve is about to invert. Powell's hands are tied. Damned if he does and damned if he doesn't.

At Secure Investments, I advise individual clients on their pension and non-pension fund investment portfolios. To learn more about my Active Asset Allocator and Gold Trader  investment strategies, please get in touch at brian@secureinvestments.ie or 086 821 5911. If you are reading this via LinkedIn, why not visit Secure Investments and subscribe to get exclusive content for free. No spam, ever. Just great stuff.

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