Hot Inflation Puts Federal Reserve Rate Cuts on Hold, Bond Yields Jump
Hot inflation data is indicating that rate cuts from the Federal Reserve are further away than ever, as bond yields soar. The two-year U.S. Treasury note yield has reached its highest level in about two months at 4.61%. Recent data has not been favorable for investors, making the pathway to achieving a 2% annual inflation rate complex. Market expectations have shifted, suggesting no change in rates for the upcoming Federal Open Market Committee’s May decision. Just a few months ago, there was an 83% probability of at least two rate cuts by that time. However, pressure on prices from shelter prices and wage gains in a tight U.S. labor market are contributing to the change.
The January inflation reading has delayed Wall Street’s forecast for interest-rate decreases to 2024, with markets now expecting a cut in June. This adjustment has also raised the possibility of resumed rate increases by the Federal Reserve. The Consumer Price Index for January rose by 0.3%, slightly exceeding expectations, with a year-on-year increase of 3.1%. The core CPI, which excludes food and energy, increased by 0.4%, bringing the 12-month gain to 3.9%. These figures highlight the challenging and unpredictable nature of inflation, complicating the timing of rate cuts and hinting at the potential for further rate hikes.
Interest-rate futures indicate a significant drop in the likelihood of a rate cut in the near term, with no expectation of a hike in the near future. Federal Reserve Chairman Jerome Powell has expressed that despite a significant reduction in inflation from its peak, it is premature to claim victory in the battle against inflation. January’s data, particularly in services inflation, highlights the persistent inflationary pressures from areas such as shelter costs and wage gains in a tight labor market.
The unpredictability of the economy and job market dynamics since the pandemic has fueled debates about the trajectory of inflation. Some believe there are signs of resurgent inflation that warrant rate increases, while others hope for a return to disinflation and potential rate cuts by mid-year. Both investors and the Federal Reserve are in a cautious approach, closely monitoring monthly inflation data to determine the future direction of interest rates and inflation.
Analyst comment
Negative news: Hot inflation data puts Federal Reserve rate cuts on hold, leading to a jump in bond yields. Market expectations have shifted, suggesting no change in rates for the upcoming decision. The unpredictability of inflation and the job market create uncertainty, with some calling for rate increases and others hoping for rate cuts. Overall, the market is uncertain and cautious, closely monitoring inflation data.
