➡️What I Read This Week…

🏦The Federal Reserve is Losing Credibility with Markets.

What's Going On?

- Federal Funds Rate Cuts: Since September, the Federal Reserve has cut the Federal Funds Rate by 1% to address a slowdown in job gains and guide inflation towards 2%.
- Contradictory Data: Despite cuts, job growth remains strong (256,000 jobs added in December), but inflation isn't cooling, showing persistence.
- Market Response: Bond markets disagree with Fed policy; 10-year Treasury yield rose from 3.6% to 4.77%. Bank of America suggests rate hikes might be more likely in 2025.

Why Does Fed Credibility Matter?

- Market Expectations: The Fed's policy effectiveness relies on market trust in its economic forecasts and decisions, aiming to lower borrowing costs.
- Market Pushback: Doubts in the Fed's strategy can lead to higher long-term rates, counteracting policy. Rising Treasury yields amid rate cuts show market skepticism, reducing the Fed's policy impact.

This scenario presents a major challenge for the Federal Reserve, as its policy influence weakens with declining market confidence.

Source: @chamath