Why are Rates up? - Jan 24th, 2025

What are our thoughts? January 24th , 2025

Is This What the Dr. Ordered? Weekly Economics by Eugenio Aleman

Why are rates up? I thought we were getting rate cuts……

This is a question we have received at the firm since the fall of last year, when the Federal Reserve cut interest rates. It’s a question that is well deserved, as one should think a cut in rates by the Federal Reserve would lead to a fall in rates. Unfortunately this isn’t how the yield curve works. This attached article is a great piece that will help clear up that question. I wanted to highlight it this week, as I believe its an important read.

Long story short, the federal reserve only controls one part of the “Yield Curve”. The part they control is the Fed Funds Rate. The Federal Funds Rate is the interest rate at which depository institutions (banks) lend reserve balances to other depository institutions overnight. That’s it. The rest of the “Yield Curve” is controlled by the open market aka “Market Participants”. Below I have a highlighted portion of the article that points that out.

Since the fed started their rate cutting cycle in September a lot has changed, we’ve had a presidential election, inflation has bounced around and remained sticky, employment has remained stronger than expected, and AI enthusiasm has yet to falter. All of these dynamics, support the possibility of stronger economic growth, which could lead to inflation staying above the fed’s target of 2% inflation. Higher Inflation leads to investors wanting more interest on their fixed income investments, propping up the “Yield Curve”.

Our analysts still believe rates will come down over time, as the Federal Reserve continues to cut rates this year, but it will take some time. We’ll have to continue to keep a close eye on inflation data, and this will give us a good indication of future cuts.