Authored by Lance Roberts via RealInvestmentAdvice.com,
The risk of Fed over-tightening rises when 5% Treasury yields, a thin savings cushion and a hike-cut-hike Fed all converge at the same time.
The Fed raised rates in September, and the 10-year Treasury yield has since topped 5.3%, the highest since 2007. That combination raises a question the market isn’t asking loudly enough. If long-term rates are already doing the tightening, does every additional hike from here raise the risk of Fed over-tightening? I think the answer is yes. What’s more, the data suggest the “runway” before the damage shows up is shorter than most assume.
On September 16, the FOMC voted 12-0 to raise the target range to 3.75%-4.00%, its first hike since 2023.1 The new dot plot puts the year-end rate between 4.1% and 4.4%. Markets now expect a hold at the October 28 meeting but still price roughly three-in-four odds of another hike by December.2 As I argued in why the Fed rate hike won’t fix the inflation it targets, the Fed’s tool works on demand and only demand. So the real question is where that demand is most exposed. Let’s take it in four steps.
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