After the latest CPI data, the Fed’s rate hike seems to be all but a done deal. According to CME’s FedWatch tool, the probability currently sits at 88.5%. Yet, according to President Donald Trump, rates should be much lower.
“We should be paying the lowest interest rate in the world, regardless of their formulas,” Trump said on Sunday, according to Bloomberg.
With CPI saying higher and Washington shouting lower, the Fed Chair Kevin Warsh is in a peculiar position. Even if he opts to hold, the bond market might see it as an institutional surrender to fiscal dominance, triggering a long-end yield spike that blindsides retail portfolios.
The Credibility Trap
The issue in the clash between the White House and the funds rate is the impact. 30-year mortgages and auto loans don’t price off the overnight funds rate the Fed controls, but off 10- and 30-year Treasury yields. The latter exceeded a multi-decade high of 5.34%, straining the market.
