The 10-Year Treasury Note yield is absolutely important to interest rates, as the Wall Street Journal said, but the landscape is far more complicated than they say.
The Wall Street Journal’s editorial board wrote about interest rates this week. They tried to explain that a change by the Federal Reserve in its short-term benchmark federal funds rate on Wednesday wouldn’t necessarily improve borrowing costs. They’re right to a degree, but the explanation is overly simplified and seems to miss the biggest point: how global markets, not the Fed, are the real force.The Journal’s Take On Interest Rates
Interest rates at all levels are always based on fundamental rates with an additional amount for risk. To understand what rates will be, the question is which reference value is in place and how much is added.
The Journal noted that expectations are for the part of the Fed that sets rates, the Federal Open Market Committee, to keep the federal funds rate at its current 4.25%–4.5%. What the editorial board called a “rate-cutting spree” last fall that was “premature” set off a run-up of yields on the 10-year Treasury Note. The response was unusual; historically, the Treasury yield curve has fallen with the federal funds rate.
There was a rebound in unexpected consumer inflation. “This climb in yields coincided with a rebound in consumer-price inflation that the Fed didn’t expect. After flattening through October, the consumer-price index rose 0.3% in November, 0.4% in December, and 0.5% in January. The FOMC hadn’t conquered inflation by September as its members had thought.
It is good to remember that, at the time, the Journal’s editorial board admonished the Fed: “The real risk for the Fed is if it embarks on a monetary easing cycle that stops the current disinflation and causes prices to rise again.
