Hike or Cut — Long-Term Yields Are Going Higher Anyway Please ❤️like, bookmark🔖, and 🔁share with fellow investors In this Short video, @LukeGromen, @DariusDale42 and @AdamTaggart discuss why the Fed may be trapped in a situation where long-term Treasury yields move higher regardless of whether policymakers hike or cut rates. * Darius' base case remains that the Fed should hike 25 basis points, potentially more than once. The reasoning starts with what has actually driven the recent bond selloff. Since the 10-year Treasury yield bottomed in late February, it has risen roughly 85 basis points. But the overwhelming majority of that move hasn’t come from higher inflation expectations — it has come from rising real rates. * Darius estimates that roughly 55 basis points of the 85-basis-point increase reflects a higher expected path for real rates. In other words, the bond market appears to be saying that the equilibrium cost of capital is moving higher. That creates a problem for the Fed. If the equilibrium rate rises while the Fed leaves policy unchanged, monetary policy effectively becomes more accommodative relative to the economy. Darius argues that the Fed may therefore need to hike simply to keep pace with that repricing and avoid accelerating the pressure on bonds. * But here’s the paradox: hiking may not bring long-term yields down. Luke notes that higher short-term rates mean more interest income flowing to holders of T-bills, money-market instruments and other short-duration assets — much of it to wealthy Baby Boomers. That income can support consumption and economic growth. At the same time, higher rates increase the government’s interest expense, worsening the deficit and potentially adding to inflationary pressure with a lag. * A Fed hike could also strengthen the dollar, putting additional pressure on foreign currencies. Foreign investors that need dollars may then be forced to sell liquid assets such as long-term Treasuries, creating another source of upward pressure on yields. So hiking could ultimately mean stronger nominal growth, larger deficits and more Treasury selling — all potentially bearish for the long end. * But cutting rates doesn’t necessarily solve the problem either. If the Fed cuts into an economy still experiencing very strong nominal growth, markets could interpret that as excessively accommodative, pushing growth and inflation expectations higher and once again putting upward pressure on long-term yields. * That’s the trap: hike rates and the long end may go higher. Cut rates and the long end may go higher anyway. A near-term hike may therefore be less about fixing the Treasury market and more about buying time — preserving the current policy regime for as long as possible before the Fed is eventually forced toward much more aggressive intervention in the bond market. #ratehike# #bondmarket# #yields# 💡 Get access to notes with the key takeaways from this interview with @LukeGromen and @DariusDale42 by visiting @AdamTaggart's Thoughtful Money Substack (link below) ⬇️