Amid rising U.S. bond yields, calls for the Federal Reserve to slow or even pause rate cuts are gaining momentum. Torsten Slok, chief economist at Apollo Global Management, has joined this chorus. He recently suggested that the Fed is more likely to hold rates steady in November due to strong U.S. economic growth.
Slok points to multiple factors underpinning this strength: the Fed’s dovish stance, high stock and home prices, narrowing credit spreads, and readily available corporate financing. He describes the current trajectory as "no landing," with continued economic expansion and resurgent inflation.
Slok highlights the Atlanta Fed's GDPNow model, which forecasts a 3.4% GDP growth for the U.S. in the third quarter. This aligns with the Fed's increasing caution on rate cuts. Kansas City Fed President Esther George and Dallas Fed President Lorie Logan urge a cautious approach to cuts due to ongoing economic uncertainties.
Amid this backdrop, U.S. bond yields have continued to rise, with yields across maturities showing significant increases. T. Rowe Price predicts the 10-year bond yield could test 5% amid rising inflation expectations and tempered rate cuts by the Fed.
Slok identifies ten favorable factors bolstering the U.S. economy: a dovish Fed, narrowing credit spreads, open financing markets, continued fiscal support from legislation, consumers locking in low rates, low corporate debt servicing costs secured at low rates, easing geopolitical risks, diminishing election uncertainties, robust spending in AI and energy transformation, and signs of a construction rebound post-rate cuts in September.
These factors contribute to the likelihood of the Fed changing its course in November. After recent developments, the rate market has lowered its forecast for the Fed's rate cuts this year, anticipating a 39-basis-point cut over the next two meetings, down from the previously expected 42 basis points.
The early part of November is expected to be crucial, with key economic events including the U.S. employment report release, elections, and the Fed’s interest rate decision.
