Tag: FOMC

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4 Key Takeaways for the Week

Key Points

  • Long-term Treasury yields climbed after the Fed kept rates unchanged.
  • The Japanese Yen is weakening as the Bank of Japan slow walks rate hikes.
  • Gold absorbs selling pressure as long-term rates rise.
  • China’s economy is slowing.

Treasury Market

The bond market has been anticipating a rate hike. This has been signaled since the 2-year Treasury yield broke above the Fed funds target range in March 2026.

2-Year Treasury Yield & Fed Funds Target (Upper Limit)

The FOMC voted to keep the Fed funds rate unchanged, with a target range of 3.5% to 3.75%. There were 3 dissenting votes, calling for a rate hike. The new Fed Chair, Kevin Warsh, is encouraging opposing views, and we can expect more dissent in the future. Warsh has also avoided forward guidance, which is likely to increase volatility in the bond market and consequently the term premium.

10-year Treasury yields climbed to 4.745% on Friday, reflecting market concern that the FOMC is not taking a more hawkish stance on inflation.

10-Year Treasury Yield

GDP grew at 6.5% over the 12 months to June, suggesting that the 10-year yield needs to rise by at least 175 basis points if the Fed is serious about containing inflation. Long-term interest rates below nominal GDP growth (the rate of return on new capital investment) encourage rapid credit growth, with demand expanding faster than output.

10-Year Treasury Yield & Nominal GDP Growth

Japan & the Sovereign Bond Market

Japan’s GDP grew by 3.6% over the 12 months to March 2026. The 10-year JGB yield is 2.8%, indicating that monetary policy remains stimulative, but less so than the US.

10-Year Treasury Yield & Nominal GDP Growth

The Bank of Japan kept its policy rate at 1.0% at last week’s meeting despite an upturn in CPI to 1.7%. The weakening Yen drives higher inflation.

Japanese CPI Inflation

The low BOJ policy rate and ongoing bond purchases aimed at suppressing long-term JGB yields undermine the currency. The Yen has steadily weakened, breaking above 160 against the Dollar in June 2026 to reach its highest level in 39 years. Japan’s Ministry of Finance intervened on Thursday to support the Yen, driving the exchange rate to 157 against the Dollar. However, the effect of these MoF interventions is short-lived because of BoJ policy.

Japanese Yen

Rising long-term yields in sovereign bond markets reflect growing concern over sovereign debt levels and the risk of fiscal dominance. When central bank policy is dominated by government bond markets’ need for support, with lower interest rates prioritized above containing inflation, the currency’s purchasing power is eroded, as in Japan.

The US 30-year Treasury yield has climbed to 5.275%, reflecting concerns over currency debasement.

30-Year Treasury Yield

The Japanese JGB yield is lower at 3.98%, but this reflects sizable ongoing QE by the Bank of Japan aimed at suppressing long-term rates.

30-Year JGB Yield

The Bank of Japan has higher debt levels relative to GDP than the UK and should theoretically trade at a higher yield. The difference in the 30-year Gilt yield lies in central bank monetary policy: the Bank of England is steadily shrinking its balance sheet, while the BoJ is actively buying JGBs in the secondary market to suppress yields.

30-Year UK Gilts Yield

Dollar & Gold

Rising short-term yields are strengthening the Dollar, with the 1-Year Treasury yield gaining more than 50 basis points in the last 6 months.

1-Year Treasury Yield (CNBC)

Gold has softened considerably from its peak of $5,500 per ounce and has been testing primary support at $4,000 over the past 8 weeks.

Spot Gold

Gold ETF inflows slowed in the first half of 2026 but remained positive, driven by continued inflows into Asian funds. North America experienced an outflow of $7.7 billion, European inflows slowed to $3.2 billion, while Asia recorded a strong inflow of $12 billion.

Gold ETF Flows

Average daily trading volumes surged to a record $488 billion in the first half of 2026.

Gold Average Daily Trading Volumes

OTC trading, led by the LBMA, averaged US$249bn/day, substantially above 2025 levels and underscoring the depth of institutional participation. Exchange-traded volumes also jumped, reaching US$227bn/day – 22% higher than the 2025 average – supported by elevated investor activity. Meanwhile, global Gold ETF trading averaged US$12bn/day – up 73% from 2025 – fueled primarily by robust trading in US funds as investors increasingly turned to Gold amid heightened macroeconomic and geopolitical uncertainty.

Comex futures net longs increased to 538 tonnes, up 16% since May, and the highest month-end level since January despite a weakening gold price. A closer look shows retail participation (non-reportable net longs declined in June, while other reportables, which capture large trades outside the managed money category, were up 16% from May. Managed money net longs remained broadly stable, declining by just 43 tonnes year-to-date. Again, H1 investor behavior differed: retail positioning largely tracked short-term price movements while larger traders’ positions have, in general, stayed stable since mid-March. (WGC)

Comex contracts standing for delivery jumped to 13,123 in July from 8,838 in May, and a 9.0% increase over July last year.

Spot Gold

China

The Chinese NBS Manufacturing PMI fell to 49.2 in July, down sharply from 50.3 in June. Values below 50 indicate a contraction in the manufacturing sector.

China: NBS Manufacturing PMI

The OECD Composite Leading Indicator for China fell to 98.6 in June, below its long-term average of 100, signaling a contraction.

OECD: China Composite Leading Indicator

The RBA’s activity indicators for China show industrial production is holding up, boosted by record exports. However, real retail sales growth has stalled, while fixed asset investment has contracted sharply following Trump’s tariff blitz last year.

OECD: China Activity Indicators

Household credit growth (purple below) has also stalled. Business credit has taken up the slack, but government credit growth is also contracting.

OECD: China Total Social Financing

Conclusion

10-year US Treasury yields jumped to 4.745% after the Fed kept its funds target range at 3.5%-3.75%, reflecting bond market concerns over inflation.

The new Fed Chair’s strategy is to keep short-term rates low and allow long-term rates to rise, to slow the rate of demand growth in the economy and curb inflation. However, nominal GDP is growing at an annual rate of 6.5%, which means that 10-year Treasury yields would need to rise by 175 basis points to keep inflation in check. An increase to 6.5% would likely cause a sharp contraction in stocks.

Japan’s Ministry of Finance has intervened to support the Yen. However, the effects will likely be short-lived, as the Bank of Japan continues to maintain stimulative monetary policy, which fuels inflation and undermines the currency.

Rising long-term sovereign debt yields reflect bond market concerns over rising sovereign debt and the risk of fiscal dominance, as in Japan, where the central bank has prioritized maintaining an orderly bond market above price stability. Erosion of the currency purchasing power is the inevitable outcome.

Gold has found strong support at $4,000 per ounce, with long-term investors prepared to wait out the turmoil in the Middle East. Demand from Asian investors has been particularly strong, but could be undermined if China goes into recession.

China’s economy shows increasing signs of contraction, precipitated by a decline in business investment following President Trump’s 2025 tariff attack. Household credit and real retail sales have stalled, and the NBS Manufacturing PMI fell to 49.2, signaling a contraction. Higher fuel prices would be an added headwind that could tip the economy into recession.

Acknowledgments

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Powell walks the tightrope with the latest FOMC decision

Key Points

    • The Fed cut rates by 25 basis points, with two more expected this year.
    • There is no change to the rate of Fed balance sheet runoff (QT).
    • FOMC dot plot projections reflect a mildly dovish long-run monetary policy, but not sufficient to antagonize the bond market.

Chair Jerome Powell announced a 25 basis-point cut in the fed funds target rate. The Target range for the federal funds rate is now 4.0%-4.25%.

There was only one dissent, from new Trump appointee Stephen Miran, who wanted a 50 basis point cut.

What’s new in the FOMC statement:

Recent indicators suggest that growth of economic activity moderated in the first half of the year.

Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.

FOMC economic projections reflect a broadly balanced economy, with unemployment rising slightly to 4.5% before easing to 4.2% in the long run. Real GDP growth is expected to slow to 1.6% in 2025, increasing to 1.8% in the long run. Median PCE inflation is projected to remain at 3.0% for 2025 before easing to 2.0% in the long run.

FOMC Projections

Dot Plot projections of the fed funds rate center around another two rate cuts of 25 basis points this year, with one outlier — possibly Miran — projecting five rate cuts.

Fed Funds Rate Projections (the Dot Plot)

Financial Markets

Financial markets already display signs of loose monetary conditions, with the Chicago Fed NFCI index falling to -0.558 for the week ended September 5.

Chicago Fed National Financial Conditions Index

Treasury Markets

10-year Treasury yields rallied off support at 4.0% on a less-dovish-than-expected FOMC projection.

10-Year Treasury Yield

Dollar & Gold

The US Dollar Index likewise found support on the prospect of higher-than-expected interest rates.

Dollar Index

Gold retraced to test support at $3,650 per ounce.

Spot Gold

Conclusion

The Fed cut 25 basis points as expected, with Chair Jerome Powell doing just enough to placate President Trump without caving to political pressure.

Dot plot projections reflect two more rate cuts of 25 basis points this year. The median fed funds rate of 3.0% is slightly higher than expected long-run inflation at 2.0%. The resulting real fed funds rate of 1.0% is somewhat dovish but not outright stimulatory. The Trump administration wants to run the economy hot, with higher inflation, to solve the fiscal debt crisis. At the same time, a negative real rate would antagonize the bond market and likely cause an upsurge in long-term yields.

Fed Chair Powell has skillfully negotiated a path between the bond market preference for higher real rates and the Trump administration’s demands for monetary stimulus. Antagonizing either group would risk a bond market revolt, the latter because it would invite increased Trump interference and possible dismissal of Powell “without cause.”

We do not expect the outcome to affect the secular uptrend in long-term Treasury yields, the dollar’s downtrend, or gold’s uptrend.

Acknowledgments

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Fed takes a pause

Fed Chair Jerome Powell announced that the FOMC has left the fed funds target range unchanged at 4.25% to 4.5%.

Powell described the labor market as “pretty stable and broadly in balance,” with a low hiring rate and an equally low quit rate.

Quit Rate

The key question for investors in the post-announcement news conference. Axios: “Was there any discussion on the timeline for ending the QT program?”
Powell responded that their indicators suggest that reserves are still abundant, and the Fed would continue with QT until that changes.

Commercial bank reserves at the Fed reached $3.33 trillion on January 22.

Commercial Bank Reserves at the Fed

However, the decline in bank reserves is expected to accelerate as the rundown in overnight reverse repo (RRP) liabilities nears an end. The reduction in RRP caused money market funds to invest more than $2 trillion in T-Bills over the past two years, effectively offsetting the withdrawal of liquidity via QT.

Fed Reverse Repo (RRP) Liabilities

Financial market conditions currently signal abundant liquidity, with the Chicago Fed Index falling to -0.65. However, that could reverse as the Fed persists with its rundown of securities on its balance sheet.

Chicago Fed National Financial Conditions Index

We will continue with weekly charts for the present as they help to keep daily volatility in perspective.

The 10-year Treasury yield (TNX) below has found support at 4.5%, and respect would signal an advance to 5.0%.

10-Year Treasury Yield

The S&P 500 is testing resistance at 6100. Selling pressure is secondary, and breakout will likely offer a target of 6400.

S&P 500

Dollar & Gold

The Dollar Index (DXY) found short-term support at 107. Recovery above 108 would indicate another test of 110. Broad imposition of tariffs would likely signal the continuation of the long-term uptrend.

Dollar Index

Gold is testing resistance at $2,800 per ounce after a bullish shallow correction. Breakout would offer a target of $3,000.

Spot Gold

Silver remains bearish, testing support at $30, with the trend direction uncertain until a breakout above $32.

Spot Silver

Conclusion

The Fed is likely to keep rate cuts to a minimum for as long as the labor market remains “in balance.”

Liquidity is likely to have a greater impact on financial markets, with an expected contraction in 2025, which is bearish for stocks and bonds.

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S&P 500 rallies as Fed tightens

Stocks rallied, with the S&P 500 recovering above thew former primary support level at 4300. Follow-through above 4400 would be a short-term bull signal.

S&P 500

Markets were lifted by reports of progress on a Russia-Ukraine peace agreement — although that is unlikely to affect sanctions on Russia this year — while the Fed went ahead with “the most publicized quarter point rate hike in world history” according to Julian Brigden at MI2 Partners.

FOMC

The Federal Reserve on Wednesday approved its first interest rate increase in more than three years, an incremental salvo to address spiraling inflation without torpedoing economic growth. After keeping its benchmark interest rate anchored near zero since the beginning of the Covid pandemic, the policymaking Federal Open Market Committee (FOMC) said it will raise rates by a quarter percentage point, or 25 basis points….. Fed officials indicated the rate increases will come with slower economic growth this year. Along with the rate hikes, the committee also penciled in increases at each of the six remaining meetings this year, pointing to a consensus funds rate of 1.9% by year’s end. (CNBC)

Rate hikes are likely to continue at every meeting until the economy slows or the Fed breaks something — which is quite likely. To say the plumbing of the global financial system is complicated would be an understatement and we are already seeing reports of yield curves misbehaving (a negative yield curve warns of recession).

Federal Reserve policymakers have made “excellent progress” on their plan for reducing the central bank’s nearly $9 trillion balance sheet, and could finalize details at their next policy meeting in May, Fed Chair Jerome Powell said on Wednesday. Overall, he said, the plan will look “familiar” to when the Fed last reduced bond holdings between 2017 and 2019, “but it will be faster than the last time, and of course it’s much sooner in the cycle than last time.” (Reuters)

The last time the Fed tried to shrink its balance sheet, between 2017 and 2019, it caused repo rates (SOFR) to explode in September 2019. The Fed was panicked into lending in the repo market and restarting QE, ending their QT experiment.

SOFR

QT

Equities are unlikely to be fazed by initial rate hikes but markets are highly sensitive to liquidity. A decline in the Fed’s balance sheet would be mirrored by a fall in M2 money supply.

M2 Money Supply/GDP & Fed Total Assets/GDP

And a similar decline in stocks.

S&P 500 & Fed Total Assets

Ukraine & Russia

Unfortunately, Ukrainian and French officials poured cold water on prospects of an early ceasefire.

Annmarie Horden

Neil Ellis

Samuel Ramani

Conclusion

Financial markets were correct not be alarmed by the prospect of Fed rate hikes. The real interest rate remains deeply negative. But commencement of quantitative tightening (QT) in May is likely to drain liquidity, causing stocks to decline.

Relief over prospects of a Russia-Ukraine ceasefire and/or any reductions in sanctions is premature.

The bear market is likely to continue.

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US October payrolls justifies December move

From Elliot Clarke at Westpac:

Recent softer gains for nonfarm payrolls cast doubt over labour market momentum, giving cause for some to question whether the FOMC would be able to deliver a first hike before the year is out.

The October report changed that view, with the 271k gain for payrolls taking the month-average pace back up to 206k as the unemployment rate declined to 5.0%.

There is certainly more room for improvement in the US labour market. But subsequent gains need to come at a more measured pace.

We continue to anticipate that a first rate hike will be delivered at the December FOMC meeting.

Read more at Northern Exposure: October payrolls justifies December move

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Will the Fed hike rates?

The market eagerly awaits the decision of the Fed Open Market Committee (FOMC) on whether to lift the target interest rate (FFR) from its 0.00 – 0.25 percent range maintained since the dark days of 2008.

Core CPI

Core CPI remains subdued at 1.83 percent for the 12 months to August — close to its 2 percent target — so there is no urgency to increase rates despite a strengthening job market.

The act of revising the target rate is largely symbolic. There is no doubt that the economy can withstand an increase in the Fed Funds Rate to 0.5%. But commencement of a tightening cycle may scare an already jittery market. There is a fairly equal split amongst economists as to whether the Fed should proceed with the rate rise or not. My guess is that the Fed will opt for a bet each way, with a wider target range (say 0.00 to 0.50 percent) or a reduced increment (say 0.10 to 0.30 percent). The effective FFR is currently sitting at 0.14 percent and I am sure the Fed’s plan is to continue with a gradual increase over time and no sudden movements.

Effective Fed Funds Rate

The S&P 500 is testing resistance at 2000 after a higher trough and rising 21-day Twiggs Money Flow indicate buying pressure. Recovery above 2000 would signal a relieving rally, while respect of resistance would suggest another test of support at 1900.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

The CBOE Volatility Index (VIX) indicates market risk is declining.

S&P 500 VIX

NYSE short sales are also declining.

NYSE Short Sales

Dow Jones Industrial Average closed above resistance at 16700. Follow-through after the FOMC decision would confirm a relieving rally. Reversal below 16600 would warn of another test of 16000. Failure of support at 16000 is unlikely, but would signal a primary down-trend. Recovery of 21-day Twiggs Money Flow above zero indicates medium-term buying pressure.

Dow Jones Industrial Average

Canada’s TSX 60 recovered above 800, indicating solid support between 790 and 800. Recovery above 820 and the descending channel would signal that the correction has ended. Rising 13-week Twiggs Momentum would strengthen the signal, while recovery above zero would confirm.

TSX 60 Index

* Target calculation: 800 – ( 900 – 800 ) = 700

Europe

Germany’s DAX found support at 10000. Recovery above 10500 would suggest a relieving rally, but only follow-through above the descending trendline and resistance at 11000 would confirm. Respect of the zero line by 13-week Twiggs Money Flow is a bullish sign; completion of a trough above zero would confirm long-term buying pressure.

DAX

The Footsie similarly found support at 6000. Recovery above 6300 would indicate a relieving rally. Penetration of the descending trendline would confirm.

FTSE 100

Asia

The Shanghai Composite Index continues to test (enforced) support at 3000. Recovery above 3500 is unlikely, but would indicate that the crisis has passed.

Dow Jones Shanghai Index

Hong Kong’s Hang Seng Index found support at 21000 and is likely to test the former primary support level at 23000. 13-Week Twiggs Money Flow below zero indicates long-term selling pressure, but recovery above zero would suggest a false signal. Breakout above 23000 and the descending trendline is unlikely, but would signal that the down-trend is over.

Hang Seng Index

Japan’s Nikkei 225 found support at 17500. Recovery above 19000 would signal a rally to test resistance at 21000. The gradual decline on 13-week Twiggs Money Flow suggests medium-term selling pressure rather than a primary (long-term) shift.

Nikkei 225 Index

* Target calculation: 19000 + ( 19000 – 17500 ) = 20500

India’s Sensex is headed for a test of the new resistance level at 26500. The primary trend is downward. Respect of the zero line by 13-week Twiggs Money Flow indicates medium-term buying pressure. Recovery above 26500 is unlikely, but would warn of a bear trap. Respect of resistance remains more likely and would suggest another decline.

SENSEX

* Target calculation: 25000 – ( 26500 – 25000 ) = 23500

Australia

The ASX 200 continues to test primary support at 5000. 21-Day Twiggs Money Flow oscillating around zero indicates uncertainty. Breach of 5000 would confirm a primary down-trend. Recovery above 5300 is less likely, but would indicate a bear rally.

ASX 200

* Target calculation: 5000 – ( 5400 – 5000 ) = 4600

Just a word of caution. Relieving rallies can (and often do) fail. Probability of a continued primary up-trend will only improve once support levels have been tested. Early movers always face greater uncertainty. Which is why our long-term portfolios continue to hold high levels of cash.


More….

Why Europe Failed

Not much wrong with the US economy

NYSE short sales easing

Marcus Miller & Eric Clapton [music]

You really wonder why leaders want these jobs when they really do not want to lead. And what is their risk? That Barack Obama will not get a second term? Or that Angela Merkel’s coalition might finally end up on the rocks? If they actually made the leap they might astound themselves. Because, in the end, everyone in political life gets carried out — the only relevant question is whether the pallbearers will be crying.

~ Paul Keating, 24th Prime Minister of Australia (2011)

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Public Debt and the Long-Run Neutral Real Interest Rate | Narayana Kocherlakota

Extract from a speech by Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, in Seoul, South Korea on August 19, 2015:

There has been a significant decline in the long-run neutral real interest rate in the United States over the past few years.

10-Year TIPS Yields

This decline in the long-run neutral real interest rate increases the future likelihood that the FOMC will be unable to achieve its objectives because of financial instability or because of a binding lower bound on the nominal interest rate. Plausible economic models imply that the fiscal authority can mitigate this problem by issuing more public debt, although such issuance is not without cost. It is, of course, the province of the fiscal authority to determine whether those costs are worth the benefits that I’ve emphasized…

How we got in this mess

There are two critically important price signals in the economy — the interest rate and the exchange rate. Tampering with them encourages distortions, leading to instability.

  • The Austrians were right: allow market forces of supply and demand to set a neutral interest rate.
  • The main function of regulators should be to ensure that debt growth is consistent with economic (GDP) growth else the banks can distort the supply of money by excessive debt creation.
  • The Austrians are also right about not running consistent fiscal deficits.
  • The other important element is to avoid consistent current account deficits to achieve a fair exchange rate.

None of these (in my view) sensible guidelines have been adhered to for the last half-century. Financial markets are in a real mess and Austrian “hands-off” policies are now insufficient to get us out of it. The only real alternative is to employ “hair of the dog” remedies advocated by Keynes: run fiscal deficits, increase public debt and distort real interest rates. Remember that Keynes published his General Theory in 1936 when financial markets were in an even bigger mess. Even a broken clock is right twice a day (or twice a century in Keynes case).

As for the Monetarists, Market Monetarists present the best opportunity to get us out of this “Keynesian hell” and set us on the path to Austrian (and Monetarist) utopia.

Read more of Narayana Kocherlakota’s speech at Public Debt and the Long-Run Neutral Real Interest Rate | Federal Reserve Bank of Minneapolis.

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Gold rallies on Fed “dovish” statement

The Fed Open Market Committee (FOMC) dropped the word “patient”, but market bulls responded positively to its “dovish” post-meeting statement. Jeff Cox at CNBC writes:

… the mostly dovish statement made little fanfare over eliminating the word, and in fact stated specifically that “an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting,” a phrase missing from previous communiques……

“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the statement said.

Like I said: “…. Janet Yellen will move when the time is right. And not before.”

Ten-year Treasury Note yields broke through 2.00%, warning of another test of primary support at 1.65%. 13-Week Twiggs Momentum below zero continues to signal a down-trend. Recovery above 2.00% is unlikely, but would signal a rally to 2.50%.

10-Year Treasury Yields

The Dollar retreated from long-term resistance at 100. Rising 13-week Twiggs Momentum signals a strong (primary) up-trend. Respect of support at 95.5 would indicate continuation of the trend.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

Gold rallied on the back of a softer dollar and weaker interest rate outlook. Expect a rally to test $1200/ounce, but respect of this level would reinforce the primary down-trend. Breach of support at $1140/$1150 would confirm. 13-Week Twiggs Momentum below zero strengthens the bear signal.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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March FOMC Meeting | Business Insider

The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

via March FOMC Meeting – Business Insider.

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