The Fed Data Dependent, But Without All The Data…

Despite the jump in stocks after the Fed’s decision yesterday, Treasury yields held pretty steady. They’ve been steady since the government shutdown began last month and have remained steady since it reopened.

The long-term yield fell to 2.9% the first trading day of the year but rebounded to 3.1%.

Yesterday afternoon, the 30-year yield still stood at about 3.06%.

As expected, the Fed held steady on the federal funds rate at 2.25% to 2.5%. That’s the overnight interest rate the Fed charges member banks to borrow for reserve requirement shortfalls. The Fed tries to control long-term rates by manipulating the federal funds rate.

In its statement, the Fed said that: “In light of economic and financial developments, and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

The Fed noted that economic activity is rising. Jobs are strong. Spending grew stronger. And investments increased moderately. Inflation remains near the 2% target.

In other words, everything is just peachy!

The stock market received its late holiday gift from the Fed yesterday since it implied that future rate hike will be on a “wait and see” basis. The case for raising rates has weakened, even though a couple more hikes this year are still on the table.

The market was hoping for clarification about future balance sheet normalization.

Fed Chair Jerome Powell noted that the balance sheet will continue to be reduced, as per the current plan. But it will be larger than initial estimates. The Committee will finalize the end of balance sheet reductions at future meetings and is prepared to adjust normalization. That’s just what the market was looking for.

Treasury bonds have recently moved based on stock price fluctuations and global yield trends. They’ve lacked important economic data that has been delayed because of the government impasse. The Census Bureau will be releasing updated data starting this week for November, though they have yet to say when Decembers’ economic releases will be out.

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