The members of the fomc of Fed They will start meeting today and tomorrow at 20pm Italian time the date will be announced. rate decision. Markets are predicting ahigh probability of a increase by a quarter of a point, the first under the new Fed chairman, bringing it to a range between 3,75% and 4,00%. Kevin Warsh did not want to give indications on the path of interest rates, as his predecessor did, but high inflation, oil at over $100 a barrel and his own emphasis on the need to ensure price stability and pay attention to market signals seem to leave little doubt about what will happen tomorrowThe restrictive decision will increase financing costs and it could slow down the economy, factors that will not please either the US citizens, nor to Trump in view of the Midterm electionsBut many investors warn that there could be bigger problems if the Fed instead decides to keep the unchanged rates.
US 10-year bonds ring alarm bells: yields above 5%, highest since 2007
Meanwhile the tension is running on the edge of bond market. The return of the global bond benchmark represented by 10-year US bonds rose today to 5,02%, touching highest level since 2007, the fateful year of the Lehman Brothers bankruptcy and the systemic crisis. round numbers are often identified as key turning points capable of catalyzing the decisions of investors and policy makers.
The rise in yields started with the beginning of the war between USA and Iran and with the increase in the price of Petroleum which has created expectations of an increase in inflation: for this reason, investors have sought cover in long-term stocks. In recent weeks, the movement has seen aacceleration in relation to Trump's statements on the long timeframe for the conclusion of the war and therefore the resumption of Middle Eastern oil and gas supplies. Added to this are other factors, such as the huge corporate indebtedness to finance the expenditure in theartificial intelligence which is flooding the markets with bonds. Furthermore, this is happening in a context in which the amount of debt US government bonds issued continue to increase, both to refinance maturing government bonds but also to finance spending in deficit (already around 6,5% of GDP): US debt recently surpassed the critical threshold of 40.000 billion dollars.
The increase in the 10-year rate is particularly important because it also serves as a benchmark in the U.S. for pricing other loans, such as mortgages. Its increase is a problem for President Trump in view of the mid-term elections, as the Secretary of the Treasury Scott Bessent said in recent weeks that the decline in ten-year yields was a key objective of the administration.
Ma if the Fed should he decide to don't raise rates Or if Warsh were to signal a less restrictive monetary policy in the coming months than money markets have already priced in, bond investors could demand even higher yields to protect themselves from inflation risks, analysts say—which means even higher bond yields.
Warsh versus Trump: How to resist the tycoon's pressure?
Tomorrow's decision is not only important for the markets, but also for the delicate interweaving between the'independence of the US central bank and pressure from the president of the United States. warsh, who arrived at the Fed last May, had been chosen by Donald Trump himself with the explicit expectation that he would cut interest rates (after the previous president had resisted such pressure). So Warsh finds himself in a difficult situationTrump has so far blamed his failure to cut rates on his fellow "political" central bankers, rather than on Warsh himself, and has even threatened to sanction trading partners if rates aren't cut. But It's a difficult time for Trump too. An increase in interest rates so close to the November elections, in which the Republican Party must defend a slim majority in Congress, could increase voters' concerns about the sustainability of the payments, giving Democratic candidates an advantage.
There are two elements to be put on the scales: on one hand the index of consumer prices in August which rose by 0,4% on the month (0,3% the core component), keeping inflation well above the central bank's target of 2%. But on the other side there are three consecutive months of declining employmentSome analysts point out that Warsh, despite having clarified in previous FOMC meetings that he no longer intended to give future guidance on the rate path, could now begin to change his tune and provide his own expectations at least for the economy.
According to analysts at Bank of America, the choice for Fed monetary policymakers is simple: “raise rates or risk a sharp rise in bond rates… Trump will not like this alternative, but he should understand the risks of a bond rate de-anchoring and the implications for the market,” they report. Reuters. “It would be very difficult for the Fed to leave rates unchanged this week without compromising its credibility in fighting inflation,” he told Bloomberg Vail Hartman, strategist at BMO Capital Markets: "The market is vulnerable not only to an unexpected hold on rates, but also to a dovish hike that implies a longer wait for the dot plot results or the press conference."
