Market Overview Analysis by Michael Lebowitz covering: United States 10-Year. Read Michael Lebowitz's latest article on Investing.com
The current unemployment rate is 4%, and the core PCE inflation rate is 2.6%. In December 2019, the unemployment rate was 3.6%, and the core PCE was 1.6%. At the time, Fed Funds were 1.5%. Here we sit today, with the unemployment rate .4% higher and core PCE 1% higher than in 2019. Yet, the Fed Funds rate is 4% more than in 2019. Does it seem a bit high?
The Fed runs an extraordinarily tight monetary policy to ensure it doesn’t reoccur. Investors are demanding a premium on yields to help protect against said fear. If the disinflation trend resumes, as seems increasingly likely, the Cleveland Fed index will likely decline. Every basis point decline in the index results in a 2.75 basis point decline in the model Treasury yield.
Assuming no significant changes to the rate of government spending, deficits will fluctuate with interest rates. Therefore, in a circular fashion, when interest rates fall, the market’s fear of fiscal deficits will likely lessen. We are not trying to minimize the deficits in how we present the data. However, proper consideration is warranted since interest rates substantially impact deficits and debt issuance.neutral rate of interest that balances the economy. It guides the Fed on how much of a headwind or tailwind their interest rate policy impacts the economy.
As you can see, the two model rates fluctuate, but both have a decidedly lower trend. The Laubach-Williams model shows that the R Star is 1.18%, while the Holston-Laubach-Williams model is 0.70%.
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