The great decoupling
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What signals are the medium-term bonds sending about Fed interest rate decisions?
On the program today, the bond market, AI, small businesses, and Botox, in that order. From American Public Media, this is Marketplace.
In Los Angeles, I'm Kai Risdahl. It is Tuesday today. This one is the 9th of December. Good as always to have you along, everybody. We all want to know which way the economy's going, right? I think that's a pretty uncontroversial thing to say. And to find out, you could, for instance, ask an economist friend what they think. Maybe a Wall Street banker, if you know one. Or better yet, a small business person. You could also clue into the Federal Reserve tomorrow when the central bank is going to release its summary of economic projections where they think rates and a bunch of other parameters are headed. You could also, though, if you are of a mind, look at the bond market. Demand for short-term treasury bills and longer-term bonds at either end of what is known as the yield curve can tell us a lot about what investors are expecting.
But there is a part of that yield curve that we don't often talk about. Medium-term treasury, sometimes known as the belly of the curve. And as Marketplace's Justin Ho reports now to get us going, that belly has been sending some signals of its own. The government issues treasuries that mature in anywhere from less than a year to 10 and even 30 years. So the belly of the curve is basically everything in the middle. We tend to focus on... two-year and five-year notes. That's Chris Lowe, chief economist at FHN Financial. He says yields on treasuries in that belly of the curve are influenced by what investors expect the Federal Reserve to do in that two- to five-year time frame. They anticipate. So when we talk about the Fed might cut rates at an upcoming meeting or they might not,
Well, we're anticipating not just the next one, but the next several years' worth. Investors know that the Federal Reserve is still trying to bring rates down to a neutral level to support full employment and stable inflation. And if investors think interest rates are going to keep falling, they're more likely to buy those bonds today. But Lowe says over the last couple of weeks, demand for treasuries within that belly of the curve has eased off a bit. When we look at the pricing of interest rates in the belly of the curve, It partly reflects a debate within the trading community, within the Federal Reserve itself, about just exactly where is neutral. Over the last couple months, expectations for economic growth have picked up.
John Canavan, lead market analyst at Oxford Economics, says the tax incentives in the budget law passed this year are expected to stimulate consumer spending. That same act has also resulted in significant investment benefits for corporations, which is likely to improve capital expenditures next year, which would help economic growth. And if economic growth continues to pick up and inflation sticks around? That actually means the Fed is likely to cut rates less. That's Kathy Bosjancic, chief economist at Nationwide. She says bond markets are only expecting two cuts next year. And beyond that? We think that then we settle into a neutral level and it could be there for a while. In other words, the belly of the curve is suggesting that rate cuts could be coming to an end.
I'm Justin Ho for Marketplace. Hmm. Wall Street today once again. I know I'm a broken record here.
How is automation impacting retail job cuts this holiday season?
Traders were waiting on the Fed. We will have the details when we do the numbers.
All right, tell the truth here. Before the financial crisis and the Great Recession, did you know what a mortgage-backed security was? Had you ever heard of a credit default swap? If I'd have asked you whether Lehman Brothers was an investment bank or a chain of auto body shops, which would you have guessed? Well, investment bank, probably most of you. But the point is, every bubble has its own jargon and its own terms of art that when things are bubbling up... they become common parlance on Wall Street. After things pop, though, all that jargon makes its way into our Main Street vocabulary.
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Chapters
8 chapters
1
What signals are the medium-term bonds sending about Fed interest rate decisions?
0:01–3:35
2
How is automation impacting retail job cuts this holiday season?
3:35–7:30
3
What economic factors are influencing small business owner optimism?
7:30–11:27
4
What are the early buzzwords indicating an AI bubble burst?
11:27–16:02
5
How are special purpose vehicles affecting corporate borrowing?
16:02–19:04
6
What challenges are small businesses facing in the current economy?
19:04–22:40
7
What is the current state of Botox sales and competition?
22:40–25:54
8
How is AbbVie responding to the changing landscape of cosmetic treatments?
25:54–26:38