Bond traders and Federal Reserve Chairman Kevin Warsh agree that the central bank's fight against inflation is far from over, despite a recent report showing the first monthly drop in US consumer prices since 2020. This report initially led investors to unwind bets on a rate hike this month. However, the probability of a July hike rose from 10% to 26% by Tuesday's close, and money markets now price a 31% chance of a rate hike in July, according to CME’s FedWatch tool. Traders are also anticipating a high likelihood of at least a quarter-point increase in September or October, seen as almost certain by December.
Warsh, who became Fed chief two months ago, has prioritized bringing down inflation, which has been above the central bank's 2% annual target for five years. He has not indicated when the Fed will act and favors reducing guidance on future rates to avoid boxing in policymakers. His stance was echoed by other regional Fed bank presidents, including Jeff Schmid, Lorie Logan, and Beth Hammack. With the Fed going into its usual blackout period before the July 28 meeting, new data or comments from officials are unlikely this week, leaving traders in the dark.
The uncertainty surrounding Fed policy has influenced Treasury yields. The 2-year Treasury note yield rose over 3 basis points to 4.298%, while the 10-year U.S. Treasury note yield was up 2 basis points at 4.648%. The longer-dated 30-year Treasury bond yield was higher by 1 basis point at 5.141%. These rising yields mean higher costs for mortgages and other loans, which is already helping to slow the economy. Analysts like Ed Al-Hussainy of Columbia Threadneedle suggest a cautious stance, as the market is pricing a more hawkish path for the Fed than some economists expect, particularly if inflation moderates in the second half of the year.
