No. of Recommendations: 9
Cross-posted. Active links with charts at
https://discussion.fool.com/t/federal-reserve-new-...The Federal Reserve controls monetary policy by adjusting the short-term interest rate (fed funds rate) and, in the case of rare emergencies, buying longer-term Treasury, mortgage and even commercial debt. These massive monetary interventions are designed to maintain full employment while meeting the Fed’s target rate of inflation.
fred.stlouisfed.org
Federal Funds Effective Rate
Federal Funds Effective Rate
fred.stlouisfed.org
Assets: Total Assets: Total Assets (Less Eliminations from Consolidation):...
Assets: Total Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level
The markets base their predictions and trades on the Fed’s expected moves.
https://www.wsj.com/economy/central-banking/jerome...Powell Steers New Strategy for a World Where Very Low Rates Are No Sure Thing
Forthcoming changes to Fed’s rate-setting framework unlikely to influence current decisions but acknowledge ‘lower-for-longer’ interest-rate era may be over
By Nick Timiraos, The Wall Street Journal, May 15, 2025
Key Points
Powell said the Fed is adjusting its policy framework due to changes in inflation and interest rates since 2020.
The Fed’s review, started this year, may not impact current rate decisions. Results are expected by August or September.
The 2020 framework proved inadequate due to unexpected high inflation that followed, but the 2% target will likely remain.
…
Higher real interest rates might “reflect the possibility that inflation could be more volatile going forward than in the intercrisis period of the 2010s,” Mr. Powell said. “We may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks.”…
Tthe review is likely to preserve the core ideas behind the Fed’s framework, including its 2% inflation target and the critical role of making sure the public believes the central bank will keep inflation low and stable. Officials think those inflation expectations are self-fulfilling and have played a big part in facilitating a decline in inflation over the last two years without a big increase in unemployment… [end quote]
The Fed tends to overlook its own role in creating the environments it has to deal with. The Fed’s huge monetary expansion (QE) after the 2008 financial crisis led to the very low real yields in the 2010s. The Fed’s immense monetary expansion during the 2020–1 pandemic years helped trigger the inflation of 2022. (Along with massive fiscal stimulus from Congress.)
Real yields on long-term Treasuries are finally rising to the historical norm after a decade of Fed suppression.
fred.stlouisfed.org
10-Year Real Interest Rate
10-Year Real Interest Rate
The bond vigilantes are beginning to require reasonable compensation for the risk of future high government deficits and probable inflation. The 30 year Treasury yield has risen to almost 5%. This is a true trend change.
fred.stlouisfed.org
Market Yield on U.S. Treasury Securities at 30-Year Constant Maturity, Quoted...
Market Yield on U.S. Treasury Securities at 30-Year Constant Maturity, Quoted on an Investment Basis
https://www.nytimes.com/2025/05/15/business/dealbo...stockcharts.com
CandleGlance | Free Charts | StockCharts.com
Quickly and easily view and analyze mini-charts of up to 12 different symbols simultaneously, all displayed side-by-side on a single page
The Fed recognizes that it has a very difficult job ahead. Previously it had to deal with Congress influencing the economy with fiscal interventions (such as taxes and helicopter money) which could conflict with the Fed’s monetary policy. Now, in addition, it has to deal with the White House meddling with supply chains via tariffs, potentially causing high inflation and recession.
Barring further QE from the Fed the markets will control long-term yields on all kinds of debt.
Nobody, not even the Fed, knows yet what their new monetary framework will be. But it could swing the markets. White water ahead!
Wendy
