“Neutral rate” creeping higher? Oh dearie! Bloodbath at the long end.
By Wolf Richter for WOLF STREET.
The 10-year Treasury yield jumped 14 basis points today to 4.49%, the highest since October 2007. Bond prices fall when yields rise, so this was quite a bloodbath today at the long end of the Treasury market.
“Neutral rate” creeping higher? Oh dearie!
It seems the Treasury market is gradually reading the memo that has been passed around for about a year. The subject line says: “Higher for longer,” and yesterday someone scribbled next to it, “maybe forever?”
Yesterday’s “dot plot” from the Fed underlined a few things in that memo. It indicated shockingly that the policy rates might still be 5.25% at the end of 2024, rather than 4.75% top of range, as it had indicated in June.
And there was discussion about the “neutral rate” creeping higher, which Powell cited as a possible reason why the economy has performed surprisingly well despite higher rates. The neutral rate creeping up and returning to the pre-QE levels of 2007 and before would introduce the “higher for maybe forever?” nuance, where the whole rate framework shifts higher, where rate cuts might not be as deep, and wouldn’t be maintained for long — unlike perma-ZIRP of yore — before getting raised to the neutral level again, which would be much higher than it was over the past 15 years (I posted an explanation and example of the neutral rate into the comments below).