Another Federal Reserve cut, another… interest rate rise? This is the current dynamic dynamic across the Treasury yield curve (real-time market rate) a week after the Fed first cut its policy rate in nearly a year. Many consumer loans, including home equity, mortgages, credit cards, and even bank deposits, take clues from bond yields. The key question for investors is, why is this happening? And… if there is, what should we do? The answers to both questions begin with the Fed, as the Fed is currently fighting against two orders (price stability and promotion of maximum employment). Recently, signs of slower labor markets have become more worrying for the Fed than increased overall inflation. Of course, the former supports interest rate cuts to stimulate employment demand, while the latter advocates for keeping interest rates high to round out price increases. The Fed has made it clear that the job market needs to be in the driver’s seat, but the bond market is less certain. For bonds, yields are locked at the time of purchase. So, you can buy a 10-year Treasury Department or lend US government money for the next 10 years, and the current yield of around 4.2% is what you’re stuck until maturity. (Bonuses are always traded before maturity, leading to fluctuations in yields. This moves backwards to prices. But that’s a completely different story.) As a result, we need to think about actual returns, namely the yields excluding time in periods of time equivalent to when bonds mature. In other words, before locking at the rate for 10 years, you need to consider what inflation will look like over a decade. We assume that inflation is too low. And you’ll probably get a negative benefit by lowering that investment period in actual terms. The actual term is to seek purchasing power. Certainly, this is not to say that the Fed was wrong in cutting 25 basis points last week. We have previously argued that the labour market deserves more focus. It says that if inflation actually recovers due to tariffs, it is more natural and temporary than an increase in unemployment. This is especially true when unemployment rates encourage businesses to adopt artificial intelligence solutions more quickly, resulting in structural reliance on human labor. Horse and buggy repairman, who? On the other hand, tariffs are like a one-off phenomenon. Price increases remain, but the price increases will decrease if the implementation date is exceeded. However, it is clear that bond market traders feel they have to hedge the move as inflation still exceeds the Fed’s 2% target and central bankers are reducing policy rates that affect the low end of bond market yields. Put another way, bond markets operating with free market dynamics to protect against inflation rebounds reduced at the short edge to protect the job market, are selling long-end ends that boost long-term treasury yields. Understanding why the yield curve is doing what it is doing is only half the battle. The other half is thinking about what to do about it. It doesn’t mean what fiscal or monetary authorities should do about it. To start with, you need to determine if you think the current dynamic will be preserved. I really don’t know why I don’t do that, like I do now. Tariffs remain intact as inflation is still hot, the Fed is cutting and trade negotiations are dragged down. It makes sense for long-term buyers to demand higher yields to lock in their money in the long term. So far, history seems to have repeated itself. Bond yields rose when the Fed eased 100 basis points late last year over three cuts. Certainly slowing down work and customs was not a factor. It was the forefront and center of inflation. However, bond yields fell to interest rate cuts in September 2024, but rose afterwards. If this year is like last year, is it time to book a victory at Home Depot and step on the sidelines? Jim Kramer asked Jeff Marks, director of portfolio analysis for the club, during a meeting Thursday morning. Jim said Home Depot’s trade is dependent on housing, which is stalling and depends on mortgage rates that fall below the short-term home equity credit (HELOC) rate for renovations. However, if long bond yields start to peak, you may not see anything other than a short pullback in Home Depot stocks. Jeff said it should be considered and should be monitored. Of course, this idea applies to all the strains that may be owned by members who are tied to the long end of the harvest curve. Luckily, we will get a significant update on inflation before Friday’s opening bell, and the August Personal Consumption Cost (PCE) Price Index will be released. Core PCE, which excludes food and energy prices, is the Fed’s favorite gauge of price pressure in the economy. Given your concerns about inflation, it’s important to read at least line up what the streets are looking for. As of Thursday, Core August PCE was up 2.9% year-on-year. Earlier this month, the consumer price index (another important gauge of retail inflation) in August saw a 3.1% increase in core rates from the previous year. It’s not a comparison between apple and april with PCE, but it’s looking for confirmation or inconsistency of what the CPI has revealed. (Jim Cramer’s Charitable Trust is a long HD. See the full list of stocks here.) As a subscriber to Jim Cramer and CNBC Investing Club, Jim receives a trade warning before he can trade. Jim waits 45 minutes after sending a trade alert before purchasing or selling stocks in the Charitable Trust portfolio. If Jim talks about stocks on CNBC TV, he will wait 72 hours after issuing a trade alert before running the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with the disclaimer. 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Fed rate reductions are not working. This is the reason and what to do as an equity investor
