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US Futures and Bond Yields: The Impact of newest Federal Reserve System policy



The Federal Reserve System’s decision to maintain the interest rate paid on reserve balances (IORB) at 5.4% effective December 14, 2023, is likely to have several potential impacts on US futures and bond yields:

  • Downward pressure on equity futures: A stable IORB rate makes it less attractive for banks to lend and encourages them to hold onto their excess reserves. This could result in a decrease in lending, which can lead to lower stock prices and downward pressure on equity futures.
  • Increased demand for US Treasury bonds: With IORB rate remaining relatively high, investors may find it more appealing to invest in safer assets such as US Treasury bonds and bond mutual funds following the Fed’s decision. This shift in investment strategies could potentially lead to a decrease in equity prices and an increase in bond yields.
  • Impact on real estate industry: The maintenance of IORB rate at this level may also have an impact on the real estate industry. With banks less likely to lend, potential home buyers may struggle to secure loans and this could lead to a decrease in demand for housing. This could potentially result in a slowdown or even decline in the real estate market.
  • Influence on automobile industry: The automobile industry, which often relies on consumer loans for car purchases, could also face challenges. Higher interest rates can make car loans more expensive, potentially leading to a reduced demand for cars.
  • Potential impact on inflation: With interest rates remaining high, borrowing becomes less attractive and this could potentially lead to a decrease in consumer spending. This decreased demand could result in lower prices and therefore, lower levels of inflation.
  • Effect on international markets: With yields on US Treasury bonds expected to increase, investors may choose to move their investments away from other countries and into US markets. This could result in a strengthening of the US dollar and potentially have an impact on global trade.
  • Potential impact on economic growth: The maintenance of IORB rate at 5.4% could potentially have an impact on economic growth. With decreased lending and potentially lower consumer spending, the overall economy may experience a slowdown.
  • Impact on borrowing costs: A stable IORB rate can also impact borrowing costs for businesses and consumers. Banks may be less likely to offer lower interest rates on loans, which could make it more expensive for businesses to borrow money for investments or individuals to take out loans for purchases.
  • Effect on foreign exchange rates: A stable and high IORB rate can make the US dollar more attractive to investors. This could result in an increase in the value of the USD relative to other currencies.
  • Effect on retail industry: The retail sector might also be impacted by stable interest rates. With borrowing becoming less attractive, consumers may be less inclined to take out loans for big-ticket items, leading to a decrease in consumer spending and potentially impacting the retail industry.

Additional factors to consider:

  • Market expectations: The actual impact on futures and bond yields will depend on how market participants interpret the Fed’s decision and its implications for future policy. If the decision is seen as a signal of the Fed’s commitment to combating inflation, yields and futures could rise more sharply.
  • Economic data: Upcoming economic data releases, such as the December jobs report and inflation data, will also play a significant role in influencing market expectations and, consequently, the impact on futures and bond yields.

Overall, the Fed’s decision to maintain the IORB rate at 5.4% is likely to have a mixed impact on US futures and bond yields. While it could put some downward pressure on equity futures, it is likely to push up short-term yields and potentially steepen the yield curve. However, the actual impact will depend on market expectations and future economic data releases.