The 10-year Treasury yield surged yesterday while the stock market sagged. The threat of higher long rates (the 10-year’s nearly 5.1% yield is the highest in four years) is becoming reality, weighing on equity and bond traders alike. But in keeping with the times, the long-anticipated rise in long rates arrives just as a cloud of debate descends over what the Federal Reserve is planning for monetary policy in the coming months.
The central bank may not be the most transparent institution on the planet, but few have been surprised by the continual string of 25-basis-point rate hikes that have prevailed since June of 2004. The absurdly low 1.0% Fed funds rate was last seen on June 29, 2004, a day before the FOMC declared it defunct by way of a quarter-point rise to 1.25%. The Fed has been making similar declarations ever since, and so Fed funds now stands materially higher at 4.75%.
The next opportunity for a declarative statement on monetary policy from Bernanke et. al. comes on May 10. Expectations for another 25-basis-point hike are baked into May Fed funds futures, but there’s also a rising tide of prediction that the tightening may be the central bank’s last for some time.
We emphasize “prediction” because this particular moment is proving to be tricky when it comes to deciding when the Fed will cease and desist with its rate hikes. Arguably, the main catalyst for expecting an end to the tightening will be a material slowdown in the real estate market. But by what definition will “slowdown” be decided? And when?
Whatever the answer, real estate is a sector that’s received a laser beam of focus recently over whether the bull market in home prices is a bubble threatening to burst until and if the central bank intervenes with sentiment-shifting incentives, i.e., higher rates. In fact, there’s been some recent evidence that the housing market has been cooling, if only marginally. But turning points in real estate, Fed policy, or any other economic/financial trend are rarely crystal clear, and the transition in housing from boom to something less is proving to be no less wily, and so the cloud of unknowing may be spilling over into the outlook for Fed policy.