New rate regime, same rate volatility?

Fed rate cuts have not appeared to end rate volatility. Treasury yields retraced their decline as markets digested a still data-dependent Fed.

• Equity markets welcomed the 50-basis point cut the FOMC delivered this week, as the decision reignited investor hopes for a soft landing. The S&P 500 hit a new all-time high while small cap stocks continued their move higher.
• After steadily declining for most of 2024, however, rates markets had the opposite reaction. Yields plunged following the FOMC’s announcement but quickly retraced their decline as traders digested the full scope of the Fed’s announcement.[1]
• Notably, the Fed dot plot and Chair Powell’s subsequent comments may not have been as dovish as some investors had wished for. Policymakers raised their longer-run rate projections again and noted that inflation risks continue to be skewed to the upside.
• Rates’ counterintuitive rise in the wake of a 50bp rate cut, combined with Fed Chair Powell’s insistence that policy will remain highly dependent on incoming economic data, suggest that the volatility that has gripped Treasury yield for the past three years is unlikely to abate.
• Importantly, while the Fed will likely continue to reduce short-term interest rates, history shows that, absent a recession, the bulk of the decline in long-term rates tends to occur prior to the first rate cut. With equity valuations historically high and the outlook for rates still uncertain, the case for investing outside traditional markets has rarely been more compelling.

Catch up on chart of the week.

[1] Bloomberg Finance, L.P. as of September 19, 2024.

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