Today is the FOMC announcement day. As expected, the Fed kept the rates unchanged at 5.25% - 5.5%. The statement looked almost exactly the same as the September one except for the changes highlighted above. The Fed acknowledged that financial conditions are tight for households and businesses in addition to the tight credit condition. To translate this to human readable language, basically the Fed is saying that it has been hard to borrow money to buy big ticket items like houses and cars. But now it’s not only hard to borrow money. Households and businesses are tight on cash to spend and invest. This is the point of tightening but things are certainly difficult for some people and businesses and we are going to see a lot more business bankruptcies in the coming year.
In the FOMC statement, The Fed also said the economy expanded (past tense) at a strong pace. Does this imply Q4 won’t be as strong? The Fed also said the job gains have moderated since earlier this year. Are they saying the job report revisions painted a less strong picture of employment? I suppose in aggregate, the Fed is saying the economy growth is moderating.
In the press conference, JPow confirmed that they will continue with QT (quantitative tightening). One of the reasons that the yields of long-dated treasuries rose so much is because the Fed stops buying so many treasuries. According to this article, when QE ended, the Fed reinvested any maturing securities to maintain the size of its balance sheet. With QT, the Fed stopped reinvesting up to $30B in maturing Treasuries and $17.5B in maturing MBS every month, passively shrinking its assets as those securities "roll off" without being replaced. Those caps were changed to $60B and $35B, respectively, in September. In other words, that $60B has to be absorbed somehow. On top of that, the treasury has to issue even more debt to meet the deficits. That is why there is so much supply of treasuries that have to be bought but apparently there are not many interested buyers so the yields had to go up to attract more buyers. I wouldn’t touch any long duration bonds at the moment. I will be more interested if I can get 6+% but it will probably take a few more months for that to happen.