As we’ve discussed over the past few months, longer-term interest rates have tended to stay elevated, even when the Federal Reserve was cutting rates. I say “was” because after their most recent meeting on January 30, the Fed opted to push pause on further cuts while they study the incoming data.
What data points are they waiting for, and why does it matter? Going back to a line made famous by former Secretary of Defense Donald Rumsfeld, there are two distinct areas of focus right now by the Fed. The “known unknowns,” and the “unknown unknowns.”   Â
The Fed’s focus in adjusting rates is part of their “dual mandate” of full employment and price stability. The concept of “price stability” is mostly rooted in trying to keep inflation at around 2%. As I’m sure you’ve seen at the grocery store, prices on things keep going up in fits and starts. Unfortunately, the inflation level is still higher than the Fed wants to see, which explains the pause in rate adjustments. The “known unknown” here is that we don’t know when inflation will slow down a bit further to allow the Fed to continue to lower rates.
Another “known unknown” would be impacts of any tariff policy emanating from the new presidential administration. Time will tell exactly what tariffs are put into place, and what sort of economic impact that may have. We did see a preview of what’s to come in early February.
A third “known unknown” is the rising government debt. Fundamentally the Treasury bills and notes fund the government deficits, and some of the increase in the longer-term rates (which impacts things like aircraft loan rates) can be attributed to market concerns about ballooning government deficit spending and subsequent increased debt.
Finally, another unknown unknown would be any geopolitical or other “black swan” event which could impact the U.S. economy. That would change the approach the Fed is taking with interest rate policy.
As the year continues to take shape, keep your eye out for these known unknowns, and always be aware of the unknown unknown that could be lurking around the corner!