Misreading the market: What surging bond yields mean for the Fed

There's the election this week but also a small matter for investors of a Fed meeting. Senior economics reporter Steve Leisman looks at the debate on whether the Fed should cut rates after what we've seen as far as a surge in bond yields. Yeah Joe this is interesting here some have looked at the recent surge in those bond yields and concluded the Fed shouldn't cut rates this week but that might miss the real debate going on in markets. It's really a debate over your favorite topic Joe, the terminal rate or that is where the Fed ultimately stops since the Fed cut 50 bips in September the 10-year yield has surged 80 basis points an unusual move with more cuts ostensibly on the way. But while that's been going on take a look the probability of a 25 basis point cut this week has remained remarkably steady now at 98 it's been north of 90% the whole time. Chance of December is now at 80% or north of 80%. It's January and beyond that's where the debate is about where rates are going and that's part of a longer-term debate that's been going on about the Fed. If you take the October 25 contract take it as a proxy for the terminal rate that is where the Fed stops it's up more than 80 basis points from 282 to 363 but notice it's still a hundred basis points lower than the current rate so the market still has lots of cuts built in just a lot less than it did before. Behind the yield surge we've had some better growth numbers somewhat firmer inflation and of course policy uncertainty with yields rising with the improved chance of former President Trump to be reelected. In fact Wells Fargo among others this chart is making the way around Wall Street has for a couple days now the 10 year yield increasing with Trump's chances of victory in prediction markets it could be expectations for higher growth could be expectations for higher deficits or both. Assessments of course of Vice President Harris's plan show less new additions to the fiscal deficit but continued high high levels of red ink. The election uncertainty adds to the markets uncertainty over what is that terminal rate. It's really hard to predict monetary policy if you don't know fiscal policy if a big change is coming but that confusion should not at least for the moment extend to the idea the direction of rates remains lower regardless of what the 10-year has done. Had a nice chat with Michael Faroli over the week on Friday JP Morgan. He says the market now is much more aligned with the Fed which is once you get through this November and December it's like in every other meeting kind of thing for next year until you get down. That's what Roger Ferguson said this morning. You know I heard Roger steal my entire line of thinking at 6 a.m. and I wondered about turning around in the traffic and coming back home because what Roger said is what. If we talked about Jim Grant and what he said when he was on did you see that? I did yeah what which part of it? The part where you have a 40 year biggest bull market in history. Does it end in a just a little whimper where an inflation is definitely you know you don't think we can. I don't know if I want to make huge conclusions over I feel like the bond market and Rick has always been very good about this finding the new finding the new range right you were down at 360 now you're back up at 425 that seems or feels like the top of a new range here and maybe it comes down a lot of talk about settling down at maybe four. I've got a bunch of questions about whether the Fed can ever rein in some and reimpose fiscal austerity at some point. Well that's a big debate that you know are you on Joe's side now on this that the Fed should control Congress? No I just have a huge question about whether if you think the Federal Reserve's actions that were taken in time in a time of urgency if that enabled fiscal austerity to get thrown out the window is there a way to wrap that back in when we're no longer in a crisis? Well I mean the Fed is going to keep okay if the Fed keeps rates at a place what is neutral that is balancing the supply of credit and the demand for credit and the government borrows a lot that neutral rate should be higher at least a long-term or medium-term rate so in that sense what the Fed is saying to the federal government is if you want to borrow more all things being equal those rates will be higher. Is that what the move in Treasury yields? I think that's part of it look the growth numbers have come in better you're two eight three percent now the jobs numbers have failed to the weekly jobless claims have been pretty strong most people are looking through I saw a little bit of softness on Friday in those jobs reports so did some other folks I thought that even if you added back the strikes and hurricanes you still were in the hundred thousand range which is definitely lower than it had been before so yes the market has been adjusting and it's adjusting to the possibility of higher deficits pretty much no matter who came in but the numbers for Trump are quite a bit higher but then you kind of get into the Paulson explanations which are all these guys coming on and saying Trump has said this but he's only going to do that and that's really part of the calculus of what he can accomplish the thing that I've been most interested in and I was a concerned about too is the tariff stuff he does not need Congress for the tax stuff both Harris and Trump they have to go through Congress for that stuff the tariff stuff because the national security provisions in the tariff law he can do on his own just for at 23% spending and it just got to come down and that's why it's just got to look continue to tell me we got to go but here's the deal the argument is that the Fed are the only adults left in the room so they ought to impose no some form of austerity on the government I should not be paying credit cards for everyone I know in my family but but there are still some things that are out there now once they spend it I am good for it but I am allowed to say can you please but Joe under your under your construction you have your kids regulating your spending yes that's the construction you're talking about if you have the Fed impose influence them to not spend as much that's not against that's not no you can influence them yes you can say that's a really good point I think Powell can and should speak up a little bit okay