USA, interest rates: 7 days of Economics

08.07.2016

This week, the yield on 10-year Treasuries reached an all-time low, below 1.40%. The decrease in US long-term interest rates is generalised: the yield on Baa-rated corporate bonds is down by almost 130 bp since early 2016, with 30-year mortgage rates down 70 basis points.

This development predates the Brexit vote. What is at play is the expectation that the Fed will remain on hold longer than previously expected. The second rate hike has indeed been postponed already. In December, FOMC members were expecting four rate hikes in 2016. In March, they changed their plans because of turmoil on global financial markets. In June, the labour market had just gave worrying signals while the British were about to vote. September no more is an option, because the Fed will want some time to monitor the Brexit consequences. As for now, the British decision eased the US monetary and financial conditions: stocks recovered their preliminary loss, the dollar is just slightly up and the yield curve moved south. Sure enough, the rebound in oil prices reversed a bit, and this will further postpone the horizon at which the US inflation moves back towards the Fed’s 2% target. Still, business surveys rebounded markedly in June, a development that could gain momentum thanks to relaxed financial conditions. On top of that, the June labour market report was reassuring. Then, a December rate hike seems conceivable. It is also very distant, and between now and then, Americans will have decided who will be succeeding President Obama…

Alexandra Estiot