Could rising long-term Treasury yields signal an end to the Fed's interest rate hike cycle?
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Federal Reserve officials have signaled in recent days that they may stop raising short-term interest rates if long-term rates remain near their recent highs and inflation continues to cool.
The Fed in July raised its benchmark federal funds rate to a range between 5.25% and 5.5%, the highest in 20 years. Policymakers held rates steady at their meeting last month and indicated they were on track to raise rates at one of their final two meetings this year.
However, rising rates appear to be increasingly driven by factors that cannot be easily explained by the Fed 's economic or policy outlook, with rising government deficits being a prime suspect. This suggests that the so-called term premium - or extra yield that investors require to invest in longer-term assets - is increasing.
“If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the federal funds rate,” said Fed voting member Lorie Logan. Logan's remarks were a notable shift from a Fed official who has been a leading advocate of higher rates this year .
Investors and the Fed
For investors, rising yields on long-term Treasury bonds may represent an opportunity to earn higher yields. However, it also represents a greater risk , as long-term bonds are more sensitive to fluctuations in interest rates.
Investors should carefully evaluate their investment objectives and risk appetite, especially in challenging scenarios like the current one.