The U.S. CPI has fallen sharply in the past two years. In August, the CPI increased by 2.5% year-on-year, which was far lower than the peak of 9.1% in June 2022. However, according to Reuters , the Federal Reserve started a new round of easing cycle with a 2-point interest rate cut. This may rekindle concerns about inflation in the U.S. bond market, with concerns that easing financial conditions may reignite price pressures.
Bond market worries about renewed price pressure
Long-term U.S. Treasury yields, which are most sensitive to the outlook for inflation, have risen to their highest levels since early September, and some investors are worried that the Fed will shift its focus from curbing inflation to protecting the job market, which could lead to a rebound in price pressures.
Cayla Seder, macro multi-asset strategist at State Street, said if we are in a rate-cutting environment and the Fed expresses its desire to provide support before the job market weakens, how quickly can inflation return to the Fed? Targets will be an issue, with long-term Treasury yields expected to climb further as markets bet on stronger economic growth and inflation.
After the Federal Reserve announced an interest rate cut last Wednesday, inflation expectations for the next ten years as measured by U.S. Inflation-Inflation Protected Securities (TIPS) have increased. Last Thursday, the 10-year break-even inflation rate rose to 2.16%, the highest level since early August. At its highest level, the index hit a new high of 2.167% on Monday.
After the Federal Reserve announced a sharp interest rate cut last week, the 10-year TIPS auction was sought after by investors, with non-dealers absorbing 93.4% of the $17 billion Treasury auction, a new high since January. However, in the week to Monday, inflows into circulation Funding for inflation-linked bonds is negative.
Will a sharp interest rate cut make it difficult for inflation to fall back to the 2% target?
BMO Capital Markets interest rate strategists noted in a report released last week that investors are once again worried about the possibility of reflation, and Ruffer fund manager Matt Smith said that in the past few days and weeks, he has been looking at Commodities and commodity stocks add inflation protection to your portfolio.
Federal Reserve Governor Christopher Walle said last week that recent data convinced him that faster rate cuts are needed because inflation may fall below the 2% target, but Fed Governor Michelle Bowman believes that a deeper rate cut may be interpreted. In order to prematurely declare victory in the fight against inflation, she opposed a 2-yard rate cut, but supported a 1-yard rate cut.
Bank of America Securities economists mentioned in a report last week a "Fed put", a term that metaphorically refers to the Fed taking action to support asset prices when the stock market plummets. The report pointed out that given the economic conditions Resilience, the stock market is at a historically high level, Ball's call "came too early," and a more aggressive easing cycle may make it more difficult to achieve the 2% inflation target.
