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10-year Treasury yield under 1.8% after Fed signals no hikes in 2020

U.S. government debt yields slipped Wednesday after the Federal Reserve signaled that it’s unlikely to raise interest rates in 2020 as previously forecast.

Yields slipped further after Fed Chair  said on Wednesday that he’d prefer to let inflation rise and hold above the central bank’s target before considering future interest rate hikes.

The benchmark 10-year Treasury note fell below 1.8% after the Fed’s announcement, while the yield on the 30-year Treasury bond also ticked lower to 2.224%. Yields fall as prices rise.

The Fed left interest rates unchanged in December as widely expected to cap one of the central bank’s busiest years in recent memory. Better-than-expected jobs numbers — including a healthy November payrolls add of 266,000 — and an apparent bottom in the summer’s soft manufacturing data helped justify the Fed’s quiet end to the year.

“The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective,” the statement said.

Fed members, however, did indicate reduced odds for a rate hike in 2020 as previously indicated through the “dot plot” of individuals’ future projections.

“In order to move rates up, I would want to see inflation that’s persistent and that’s significant,” Powell said from a press conference in Washington. “A significant move up in inflation that’s also persistent before raising rates to address inflation concerns: That’s my view.”

As recently as September, Fed officials weren’t sure as to the best course of monetary policy next year. At the time, eight members saw no changes necessary in 2020 and nine suggested one or more increases could be warranted. The Fed added that for 2020 it sees 2% GDP growth, 1.9% core PCE rate and the unemployment rate at 3.5%.

“The Fed succeeded in making today’s FOMC statement as uneventful as possible,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. 

“Take all with a grain of salt and the same can be said for any 2020 forecast but particularly the Fed’s,” Boockvar added. “Also, because of these forecasts being about on trend, their fed funds rate median projection is for no change in policy.”

The spring and summer months proved trickier for Powell and his colleagues to navigate as earlier expectations for an economic slump and concerns over the U.S.-China trade war forced the Fed to pivot from 2018’s four rate hikes to a brief “mid-cycle adjustment” easing.

The central bank voted to cut the overnight lending rate three times between July and October in a stated effort to safeguard against “downside risks,” support to economy and further goad inflation.

Federal Reserve Chair Jerome Powell holds a news conference following the Federal Reserve’s two-day Federal Open Market Committee Meeting in Washington, July 31, 2019.

Sarah Silbiger | Reuters

A September cash crunch in the repo, or repurchase, market forced the Fed launch operations to ensure banks had the overnight funding they need at rates within the central bank’s intended parameters.

The Fed’s balance sheet, or the sum total of the obligations the central bank is carrying on its books, has grown by $306 billion since it began repo operations in September, he added.

The Labor Department reported Wednesday that consumer prices rose slightly more than expected in November as fuel and housing costs pushed up how much everyday Americans spend. The government’s headline consumer price index rose 0.3% in November from the prior month, just above what economists polled by Dow Jones had expected.

Core CPI rose 0.2% as expected and has risen 2.3% from a year earlier for two consecutive months.

Market focus also remains on global trade developments amid conflicting signals about whether the U.S. will impose even more tariffs on Chinese goods on Sunday.

Speaking at a Wall Street Journal conference on Tuesday, White House economic advisor Larry Kudlow said tariffs on another $156 billion in Chinese goods were “still on the table.” His comments came after multiple media reports suggested the White House was considering holding off on extra levies this weekend.

The world’s two largest economies have imposed tariffs on billions of dollars’ worth of one another’s goods since the start of 2018, battering financial markets and souring business and consumer sentiment.

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