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Your guide to what the 2024 US elections mean for Washington and the world

Good day. Ride-hailing company Lyft rose 22 percent yesterday and sportswear maker Under Armor rose 27 percent. Both companies reported strong quarters and raised their forecasts, after years of lackluster results. Both are second fiddle to larger competitors, Uber and Nike, respectively. Is this an underdog market? Should we expect big things from Pepsi next quarter? Email us: [email protected] and [email protected].

The Federal Reserve

In central banking, boredom is success. The Federal Reserve’s policy announcement and press conference yesterday were, by this measure, successful. A quarter of a percentage point was cut from the policy rate. Chairman Jay Powell said nothing new about how he and his colleagues view the economy. They still think: inflation is falling, the economy is healthy, and politics is tight. And they are still feeling their way towards a neutral type, which they will only know when they reach it.

There was no appreciable market reaction. Well done everyone.

Reporters pressed Powell on what the reelection of Donald Trump, who has made unpleasant noises about him and the Federal Reserve in the past, meant for banking policy. Here, however, some non-boring moments escaped. One of those moments was the only one-word response during Powell’s tenure (as far as Unhedged remembers). Would you leave your job before the end of your term, if Trump asked you to? “No.” Next question. Then there was a brief five-word comment. Does the president have the ability to fire you or other Fed leaders? “Not permitted by law.” Noted.

Additionally, Powell made clear that potential policy changes under a new Trump administration would not be taken into account by Fed policymakers until those policies were enacted: “We don’t guess, we don’t speculate, and we don’t assume. ” (Unhedged’s motto: “We guess, we speculate, we assume.” It takes all kinds.)

A more paranoid interpreter of the Fed’s statements than Unhedged might wonder if this is strictly true.

Powell was asked about the recent rise in long-term interest rates and whether these higher borrowing costs presented a risk to growth, as he said they did when they were at a level nearly as high a year ago, when the inflation was still high. The question was smart. The market consensus is that the rise in the 10-year Treasury yield is due to “Trumpflation.” The argument is that the next president’s tax, immigration and tariff policies will increase inflation and therefore require tighter monetary policy and increase the deficit, requiring greater compensation to tempt investors to buy the bonds at long term of the government. So the question was about Trump, without explicitly mentioning him. Here is part of Powell’s response:

It’s too early to really say where they (long-term rates) sit. . . I will say, however, that it appears that the measures are not primarily about higher inflation expectations. In reality, it is a sense of greater likelihood of stronger growth, and perhaps fewer downside risks. So that’s what it’s about. You know, we take into account financial conditions. If they are persistent and material, we will certainly take them into account in our policy. But I would say no, we are not in that state right now.

In one sense, Powell is absolutely right. The chart below breaks down the rise in 10-year Treasury yields since bottoming in late September. Most of the increase is due to real interest rates, here represented by yields on Treasury Inflation-Protected Bonds (Tips), in light blue. However, almost 40 percent of the increase is due to higher breakeven inflation (the difference between nominal returns and tips), in dark blue. Higher inflation expectations are an important part of the picture.

However, the fact that most of the increase is driven by higher real yields does not imply that it is mainly about growth expectations. Higher real yields may reflect growth expectations, which move money away from safe Treasuries and into riskier assets. But they may also mean that investors demand more compensation for higher rate volatility in the future, exactly what investors would do if they thought the U.S. fiscal situation was becoming more dangerous. But talking about the latter possibility would lead Powell into a conversation about how to respond to things that are (at least in the market’s eyes) largely effects of Trump’s expected policies. And Powell has vowed not to talk about expected policies, much less act on them. Saying that raising rates is about growth lets you off the hook.

Powell and his team may be decoding the rise in long-term rates differently than I do, and may have very good reason to think it is about growth rather than inflation or fiscal prospects. The point is not to doubt his sincerity, but to highlight the delicate balance he will have to strike in the coming months, as the shape of Trump’s policies becomes clearer (or, worse, not clear).

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