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Treasury yields rise as Fed expected to hike rates again

Yahoo Finance’s Jennifer Schonberger joins the Live show to discuss the expectations for Wednesday’s Fed’s FOMC meeting.

Video Transcript


JULIE HYMAN: The Fed is kicking off its two-day policy meeting, and that means tomorrow, it's going to announce its latest rate decision. The markets have priced in another 75 basis point hike after hotter-than-expected inflation data and Fed Chair Jay Powell's renewed pledge to be aggressive when it comes to inflation.

Joining us to preview this week's FOMC meeting is Yahoo Finance's Jen Schonberger. So Jen, 75 basis points does seem to be the consensus at this point.

JENNIFER SCHONBERGER: Good morning, Julie. And you guys were mentioning the yield on the 10-year Treasury before bringing me in. I also want to draw viewers' attention to the yield on the two-year Treasury because it is steadily marching towards 4%, just a shade under that right now, the highest level since 2007 as the Federal Reserve, as you said, kicks off its two-day policy meeting where it is widely expected to raise its benchmark interest rate by 3/4 of a percentage point when that policy meeting concludes tomorrow, Wednesday.

Now, in the face of stubborn inflation, officials are expected to raise the Fed funds rate to a new range of 3% to 3 and 1/4%. That would be up from the current range of 2 and 1/4% to 2 and 1/2%. This would mark the third consecutive 75 basis point rate hike since June, bringing the Fed funds rate up to the highest level since 2008.

The Fed likely to signal that they will raise interest rates more aggressively and expect rates to be higher for longer when they release a summary of each official's interest rate expectations, known as that so-called dot plot. Now, markets expect the benchmark interest rate to rise above 4% by the end of this year, according to the CME Group. However, how high and how quickly interest rates go from there and how long they remain at high levels remains uncertain.

We pointed out the yield on the two-year just shy of 4%. I want to bring up the chart for the 10-year. Look at that spread. The yield on the 10-year 3 and 1/2 below that of the two-year, around 3,9 and change, so clearly inverted. That has typically been a harbinger for recession. Fed Chair Powell has said that pain would be required to bring inflation under control, implying that the Fed is willing to withstand a recession in order to bring inflation under control. The question is, how much pain is the Fed willing to withstand to cool inflation? Guys.

BRAD SMITH: Jen, while we have you, what is the tenor that you're expecting from Fed Chair Jay Powell? Because it's even more than the decision that they make and announce tomorrow, but it's even more about how he actually kind of positions the chatter around what their discussion was even prior to those meeting minutes coming out.

Of course, it's really what the Fed chair is going to signal to anybody who's listening in as the Fed has been looking to not just regain credibility among the American populace, if you will, but then also continuing to ensure that even within their policy decisions that it's not this massive shock wave and that they're signaling, as best as possible, what the pathway may be going forward.

JENNIFER SCHONBERGER: Yeah, absolutely, Brad. I mean, Fed Chair Powell struck a very hawkish tone at Jackson Hole, sort of laying the groundwork for tomorrow's meeting's decision. So I would expect him to remain steadfast that the Fed is willing to do whatever it takes to bring inflation back down to that 2% target level.

So as much as we are going to be paying attention to the actual interest rate decision, we will be getting projections from the Fed on what their outlook is for inflation, what their outlook is for unemployment and the economy, and, most important, how they are going to position monetary policy, how steeply and how quickly they're going to be raising rates based on their outlook for inflation.

And so all eyes will be on Powell for that press conference that he gives at 2:30 PM Eastern. Again, I expect him to remain steadfast. He has invoke-- invoked Paul Volcker in the past, implying that he is going to take the same approach and do what is right to bring inflation down, even if that means a recession at this point.

BRAD SMITH: Yahoo Finance's Jennifer Schonberger, thanks so much. And let's continue this conversation, too, because there's been so much expectation that's been building up from some of the banks and what they're expecting, and even, furthermore, not just this meeting, but what's to come at future meetings, too, from the Fed.

JULIE HYMAN: Right. And Jen just mentioned Paul Volcker--


JULIE HYMAN: --of course, the famous Fed chairman who really ratcheted up rates in order to get inflation down. And "The Wall Street Journal" yesterday got a lot of attention by publishing a story by Nick Timiraos, who's viewed as someone who has a line into the Fed, if you will, emphasizing that point about Paul Volcker and that, indeed, even if the Fed, even if Jay Powell is not explicitly saying we are willing to take the economy into recession, that is the implication of the messaging recently that we have gotten from the Fed, the invocation of someone like Paul Volcker, who he mentioned at Jackson Hole.

So all of that-- given all of that, I guess, it's not surprising that you do see more trepidation on the part of the market going into this Fed meeting and not as many people talking about, oh, well, going into next year, we'll see a cut at some point or a pause at some point because the focus is on this.

BRAD SMITH: Yeah, there's been a pause on the pause narrative for a little bit here. And I think the markets, of course, were taken by storm after that Jackson home-- Jackson Hole symposium because that was the clear shift in that there was no longer that pivot mentality that was even on the table. And so now it's a larger question of, to your point, how deep a recession might be that the Fed is comfortable with letting happen in order to meet some of their benchmark targets as well going forward.