Investors are bracing for the Federal Reserve to double down on its commitment to crushing inflation, and expect its chair Jerome Powell at the annual central bank gathering in Wyoming this week to deliver an aggressive tightening message and dash hopes for a rate cut next year.
The Jackson Hole, Wyoming retreat comes after investors last week viewed the transcripts from the Fed's July meeting as leaning dovish and as a green light to put some risk back on the table. The stock market initially held up and bond yields were steady, before markets re-considered that interpretation.has fallen roughly 3.8%, the benchmark 10-year Treasury yield has risen about 10 basis points and nudged back above 3%, and the dollar gained around 1.
The Fed, in the July meeting minutes, said it saw "little evidence" that inflation pressures have eased, but recognized the risk it might tighten too much and curb economic activity.Fed funds futures have priced in a 51% chance of a 50 basis-point rate hike next month, with the fed funds rate hitting 3.6% by the end of the year . A week before Wednesday's release of the minutes, the rate futures market had factored in a 75-bps rate increase.
"I think the Fed goes more than what the market thinks in terms of rate hikes. I don't think inflation is going to be at 2%-3% next year. It's baked in the cake," said Bassman. Still the bond market is pricing in a less dire inflation picture. One gauge, breakeven inflation , which measures the difference between the yield on U.S. Treasury Inflation-Protected Securities and nominal Treasuries, has declined since mid-June from one-year out to 30-year maturities, Refinitiv data showed.Standard Chartered's Englander believes the Fed will do whatever it takes to pull inflation down to its 2% target, but it won't do all the hikes in the next few meetings.
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