CNN invited me on air on October 13 to talk about the economy, inflation, the outlook for interest rates, and even the French debt crisis! The Federal Reserve meets on October 27 and 28, and could raise interest rates again. I’m guessing they won’t.
But markets aren’t waiting for the Fed. The market sets long-term rates, and those are the rates that affect most consumers and businesses. Here’s the CNN clip, with some takeaways to follow:
The Fed raised short-term interest rates in September for the first time since 2023. The Fed thinks inflation, at 3.4%, is too high, and raising rates is the standard way of forcing it down. Normally, the Fed wants inflation to be around 2%. It hasn’t been that low since 2021, which means we’ve had above-target inflation for more than five years straight.
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Oil prices are a huge factor pushing inflation higher, and oil prices depend on what happens in the Iran war that President Trump started in February. Nobody knows when Iran might stop disrupting Persian Gulf energy supplies. If there’s some kind of deal to end the Iran war—after the midterm elections, for example—oil prices would likely plunge, making inflation more benign.
Prediction markets think the Fed won’t do anything at its next meeting. On Kalshi, the odds of a rate hike in October are just 18%. The odds of the Fed keeping rates steady are 81%.
The Fed’s rate-setting activities affect long-term rates, but so do a lot of other factors. And long-term rates have soared this year, even with minimal action by the Fed. The benchmark 10-year Treasury yield has jumped from 4% before the Iran war began in February to around 5.25%. Other rates linked to the 10-year have risen in similar measure. The average mortgage rate has soared from 6% in February to about 7.4% now.
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But that might be as far as rates go for a while. The 10-year Treasury has actually retreated a bit from a high of 5.31% on October 5. Economist Ed Yardeni of Yardeni Research thinks the 10-year yield will settle between 4% and 5% in coming months. That would bring the cost of mortgages and other loans down.
What about France? I wrote recently that the French debt crisis could be a preview of a US debt crisis that might hit in two or three years. CNN anchor Erica Hill asked about that. I cited billionaire investor Ray Dalio, who thinks the United States might only have a couple of years left until investors start worrying that the US government has so much debt it might not be able to pay it all off. If that happens, interest rates will rise more, the cost of paying interest on the national debt will get even higher, and large spending cuts and tax hikes might be inevitable.
But we’re not there yet, so enjoy a cartoon.
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