US: Fed Says Wait Until 2024

Implications for treasuries

The net impact on the bond and rates market has been muted. However, if we take the forecast revisions (which were to the upside) and add that to the commitment to keep the funds rate anchored, the net effect is to leave the long end less protected (by the Fed). In consequence, if there were to be a break-out from this meeting, it should be in the direction of a steeper curve from the back end. As it is though, the 10yr Treasury yield remains in sub-70bp territory and the 2/10yr spread is flat-lining in sub-55bp territory.

The curve remains very directional with respect to data going forward. The anchor on front end rates has been extended through to 2023, which mean that 2yr yields are going nowhere. These should break-even versus a projected fed funds rate, which is effectively in sub-10bp territory for the foreseeable. If anything, the 2yr yield should be lower from here, as compensation through a term premium out to the 2yr is pretty meaningless. The shape of the curve will come from where 10yr and 30yr rates go to.

Any break out of flattening from here would frustrate the Fed. Part of the rationale of average inflation targeting is to give the low fed funds rate environment the biggest possible bang for its buck. A flatter curve against that backdrop would imply that the Fed needs to do more. The interesting nuance here, though, is that if the Fed did have to do more it would likely include some longer duration quantitative easing i.e. more buying of longer dates. Therein lies the dilemma for the curve, and direction – still a mean-reverting process in consequence.

Nothing to bother the dollar bear trend

Despite a flicker at the long end of the bond market, there was nothing really in the FOMC statement or the projections to un-nerve the conviction view that reflationary Fed policy is a dollar negative.

Key components to this summer’s dollar decline have been the sense of recovery (today’s Fed upgrades to 2020 GDP and employment forecasts help here) and ultra-low rates (unchanged policy Fed policy through 2023 also help) resulting in real yields deep in negative territory.

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Moon Kil Woong 1 month ago Contributor's comment

Yay so basically they now need to do nothing and all the good news for the next President is pushed up to help the current president. The Fed gets more political and more permissive to help the present at the cost of the future constantly. What happened to a Fed that tries smoothing out the market cycles and preparing for the worst? What happened to constraint and not playing politics? What happened to the Federal Reserve realizing they don't know the future?

Old Time Investor 1 month ago Member's comment

Yes, very troubling.