Why corporate bosses are worried about new Kevin Warshs stance on interest rates
Kevin Warsh’s second Fed meeting ended like his first one: No raising of the short-term interest rates – and corporate America worried about the consequences, On The Money has learned.It’s not necessarily inflation per se that has CEOs worried, though that’s a concern.According to C-suite executives interviewed by On The Money, the major worry is about the slope of the so-called yield curve, which prices interest rates on short-term bonds to those on the 30-year Treasury.Keeping the Fed Funds rate at its current level — a target of 3.50% to 3.75% — will impact short term rates, of course, but it does nothing to lower those longer-term interest rates that matter the most in the economy.
In fact, it might steepen the yield curve more, and choke off the No.1 driver of the economy, the artificial intelligence buildout.That’s exactly what happened after Warsh’s stand-pat announcement.
Yes, stocks sold off because he reiterated his fealty to the 2% inflation target, which seems hawkish.Bond traders are often more sophisticated in their analysis taking a longer term view of policy, and they were unimpressed, maybe a little worried.
Yields on the 10-year and 30-year bond spiked.Here’s something that most people even on Wall Street stock trading desks don’t appreciate: The Fed Funds rate doesn’t matter that much since it doesn’t directly impact most borrowing costs.It’s the so-called long end of curve – yields on the 10-year and 30-year bonds — where most CEOs, CFOs and other top corporate executives focus.These are the interest rates that determine not only how much corporate bosses will pay to borrow in the market to expand their business, but also the price of most consumer loans including credit cards and mortgages.And those interest rates have been rising (the 30-year is over 5% and the 10-year is heading that high).
Some of it is related to inflation like higher oil prices amid the Iran conflict.But largely their spike, I am told,...