Today is the FOMC announcement day. As expected, the Fed kept rates unchanged. The FOMC statement changed quite a bit from June to July as shown above. Basically, the Fed thinks the inflation is coming down, unemployment is ticking up and they are paying attention to both inflation and unemployment. If the trend continues, they will start cutting rates. The current consensus is that the Fed will start cutting in the next meeting in September. As we are getting closer to the election, I think the next few months will be pretty chaotic. The Fed probably will try to be as non-partisan as possible but I wouldn’t be surprised by big surprises from the political circus. The Treasury has been issuing debt like crazy to meet deficits and they are issuing way less treasury notes and bonds than usual, which keeps the yield for medium-term and long-term treasuries low. Instead, they issue way more treasury bills. But can they really do this forever? Who will be the buyers once they have to issue more longer-duration bonds? Will there be sufficient demand when the bills yield a lot less after rate cuts?
