December 15

12/15 - With no government data available, the Federal Reserve was flying blind when it lowered the federal funds interest rate by ¼ percentage point in late Oct. The Fed is still blind, given delayed or incomplete CPI and unemployment data – but again it lowered rates by ¼ percentage point last week. Despite wrestling with 3% inflation – well above its 2% target – the Fed is choosing to prioritize a weak jobs market over fighting inflation. That will help stave off or delay any jobs-induced recession, but it increases the threat of stagflation for 2026. The bond market’s reaction to the Fed’s rate cuts has been telling. Ten-year treasury yields that had declined to 3.95% on 10/22 have rebounded to 4.19% (12/12) - despite the Fed lowering short-term rates twice in 3 months. Why? The economy is between a rock and a hard place. The rate on Treasuries is set by investors - and investors are going to demand a rate that keeps ahead of inflation.