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The Federal Reserve kept short-term interest rates unchanged at 3.5% to 3.75% at its policy meeting on January 28. Chair Jay Powell cited solid recent economic growth and the higher-than-desired inflation rate as reasons for waiting and watching before making any further cuts. Also, the urgency to cut is less now, after the dip in the unemployment rate in December signaled that while the labor market remains subdued, it is stabilizing and not worsening.
We expect that the Fed will continue to stand pat at its policy meetings this spring, unless the labor market takes a turn for the worse. While Fed governors Waller and Miran voted to further cut rates at the January 28 meeting, there were 10 votes in favor of waiting. A new Fed Chair will take over from Powell in May and could very well enact a cut at the June 17 policy meeting, but if economic growth remains solid, the other committee members will likely resist more than a token cut or two this year. However, a downward revision of last year’s job gains is expected to be released as part of the January jobs report on February 6, and if that combines with a poor January report, that could up the odds of a rate cut at the next Fed policy meeting on March 18.
The 10-year Treasury yield is still hovering around 4.2%. Right now, downward pressures from fears of an economic downturn because of a weak labor market are being balanced by upward pressures from continued economic and productivity growth, and an inflation rate that is still a bit too high at 2.7%. The 10-year yield is often used as the benchmark for setting mortgage and auto loan rates.
The bond market’s yield curve will become fully upward sloping sometime this year, for the first time since 2021. Bond investors’ concern that an economic slowdown looms is shown by the fact that current one- to three-year Treasury notes have lower yields than short-term Treasury bills that mature in a few months. As the uncertainties surrounding the path of the economy gradually get resolved, fears will diminish and medium-term rates are likely to pick up a bit. The long end of the yield curve is likely to stay elevated.
Mortgage rates have dipped as the 10-year Treasury’s yield has stayed around 4%. 30-year fixed-rate mortgages are currently around 6.1%. 15-year loans are at 5.5% for borrowers with good credit. If the economy weakens, then rates should decline, but odds are that rates at the end of 2026 will be close to where they are today.
Top-rated corporate bond yields have also been following Treasury yields. AAA-rated long-term corporate bonds are yielding 4.7%, BBB-rated bonds are at 5.0% and CCC-rated bonds are at 12.0%. CCC-rated bond rates tend to rise when the risk of recession rises, and fall when either the economy strengthens or the Fed cuts rates, which eases financing costs for businesses that are heavily indebted.
