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Federal Reserve chairman Kevin Warsh gave what financial markets regarded as a fairly hawkish speech on August 28 at the Fed’s annual Jackson Hole conference. Fed watchers are taking the speech as a promise to raise interest rates later to fight inflation. However, Warsh has not yet pulled the trigger on rate hikes since he became Fed chairman in May. His next opportunity to do so will be the September 16 policy meeting.
The Fed held short-term rates unchanged at its July 29 policy meeting, but the long-term bond market was less than happy with Warsh’s explanations during the following press conference. He talked a lot about the Fed’s commitment to lowering inflation, but repeatedly cited the recent rise in market interest rates as doing the Fed’s job for it. Warsh also seems to believe that talking tough by itself will reduce inflation expectations, but he has yet to learn the lesson that establishing Fed credibility requires actually raising rates at some point, which his predecessor, Jerome Powell, did in 2022-23.
Upward pressure on long-term bond rates will also continue as long as the Iran war lasts. 10-year Treasury yields have risen from 4.5% to 4.7% in August, and will keep edging higher as long as high crude oil prices threaten to bleed into the rest of the economy in the form of expensive gasoline and diesel. If a cease-fire is reached and doesn’t break down the way the first one did this summer, then the 10-year Treasury’s yield will return to 4.5% or a little less. Without any sort of peace deal, it may approach 5.0% by the end of the year.
Mortgage rates are edging up again in tandem with Treasury yields. 30-year fixed-rate mortgages are currently around 6.7%. 15-year loans are at 6.0% for borrowers with good credit. Mortgage rates will creep higher as long as upward pressure on long-term bond rates continues, but they should remain below 7.0%.
Top-rated corporate bond yields have also been following Treasury yields. AAA-rated long-term corporate bonds are yielding 5.3%, BBB-rated bonds are at 5.6%, and CCC-rated bonds are at 14.6%. CCC-rated bond rates tend to rise when the risk of an economic slowdown mounts, and fall when either the economy strengthens or the Fed cuts short-term interest rates, which eases financing costs for businesses that are heavily indebted.
