10 & 30-Year Yields Surge, Yield Curve “Steepens,” Stocks Drop, as Fed Talks Up Rate Hikes in 2019
by Wolf Richter
WolfStreet.com
Oct 7, 2018
Ironically, after having lamented the flattening yield curve for a year, soothsayers now lament the steepening yield curve.
On Friday, capping a rough week in the US Treasury market, the 10-year yield closed at 3.23%, the highest since May 10, 2011, and stocks fell for the second day in a row. This is an unnerving experience for pampered equity investors who’ve come to take endless stock-price inflation for granted, who’d figured for years that interest rates would never rise, and as short-term interest rates began rising, figured that long-term interest rates would never rise – and now they’re rising too.
To rub it in that this is a new world, similar to the old world before QE and before zero-interest-rate policy, another Fed heavy-weight discussed what’s coming: Quite a few more rate hikes.
New York Fed president John Williams told Bloomberg TV on Friday that we’re witnessing a “Goldilocks economy” with strong labor market, earnings growth, “low and stable inflation,” etc. “We want to sustain this economy, we want to keep it in good balance, so we don’t want to see inflationary pressures pick up,” he said.
And the topic came to “neutral” – the infamously theoretical short-term interest rate that is high enough to stop pushing the economy but is low enough to avoid slowing it.
“Of course, we don’t really know what the neutral interest rate is,” he said, pointing out that the FOMC members on average peg it at “about 3%. “We’re just a little bit above 2% for the federal funds target, so we have a ways to go to get to some idea of what people think of as neutral. We don’t really know where that is…. We continue to get closer to the range of neutral over the next year.”
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