During the most recent Federal Open Market Committee (FOMC) meeting and press conference, chairman Powell reiterated that the committee intends to begin raising interest rates in 2022. The bond market already reflects some of these changes and looks similar to the last time the FOMC was increasing rates in 2018 but with some important differences.
The U.S. Treasury yield curve (the difference between long and short-term interest rates) has been flattening (the difference between the long and short-term rates has been declining) and ended the week at similar levels to the early months of 2018.
One of the major differences between the current environment and 2018 is the absolute level of interest rates. The 30-, 10-, and 5-year U.S. Treasuries are 100bps below the early 2018 level and even further below their 2018 peaks.
Another major difference between 2018 and the current period is the Federal Funds Rate. When Chairman Powell took over in February 2018, the Federal Funds Rate was already at 1.5%, on the way to 2.5% at the end of 2018, before the FOMC reversed course and began to cut rates in mid-2019.
Yield curves continued to flatten during those post-February 2018 FOMC rate increases. There is not much room left for yield curves to continue flattening from current levels before they become inverted (long-term below short-term), and the FOMC has yet to being raising interest rates.
The current low absolute level of U.S. Treasury yields and the flatness of the yield curve suggests that investor expectations for economic growth and inflation have declined (compared to 2021 and to prior cycles) without the FOMC even beginning to change their interest rate policy stance. This could mean that this interest rate hiking cycle could be shorter in terms of time, and shallower in terms of the level, compared to prior periods.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC