Last month, the Fed Watch CME tool predicted the odds of a 25-bps rate cut for December at around 95%. That fell to below 45% as of Nov. 15.
In the last month, the 20+ Year Treasury Bond ETF (TLT) lost 2.7% to close at $88.87. With rates likely on hold, investors may continue to hold the floating rate bond ETF (TFLO) to earn 4.28% in interest income.
Dual Mandate Not Met
The Fed is at risk of failing to achieve its dual mandate of full employment and stable prices. The latest ADP and Challenger reports suggested that non-farm payroll data is weakening. The consumer price index hovered at around 3.0% in the last 12 months. After the Fed cut rates, inflation risks are accelerating. Moreover, tariffs are exacerbating inflation. Yet the Fed dismissed tariffs as transitory.
Consumers might get a break from tariffs. The President removed tariffs on over 200 goods to lower prices. In addition, the Supreme Court may rule that tariffs are illegal. That should help ease inflationary pressures. In addition, corporations may slow down on blindly cutting jobs. They do not need to lower costs to offset tariff-related expenses.
Your Takeaway
The 12-month treasury bill yield bottomed at 3.46%. This is well off from its 4.41% high for the year. The bond market still expects rates to fall over the medium term.
