The Fed's higher-for-long messaging strengthened this week, even as rates were left unchanged (as expected) and there was hardly a change in the press statement. “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account ...” same old there, leaving the Fed flexibility to move further if they deem necessary. But the market really keyed in on the fact that the amount of easing by the end of 2024 (in the dot plot) was reduced from 100 bps to 50 bps, leaving projected fed funds still above 5%; and the 2025 end point was also raised, to 3.9%. Also notable is the fact that the Fed now sees restrictive policy (feds funds above the neutral rate) right through 2026.
Gone are the days when the market was pricing in rate cuts in the relatively near future. The 10-year Treasury yield made a run at 4.5% this week, the highest level since just before the financial crisis broke open in 2007. Two-year yields have also pushed to new highs, reaching the highest since 2006, and the market is now not pricing in a full Fed rate cut until September of next year. Back in Canada, the closely-watched 5-year GoC yield also hit news highs this week, reaching levels last seen in 2007. That's also almost 150 bps above the spring lows and should continue to filter into mortgage rates. As such, rate-sensitive sectors struggled again on the week.