US | Concerns over Fed independence keep weighing on term premia

Summary

The fiscal bill approval, set to push debt higher over the next decade, had puzzlingly only a muted impact on term premia and the U.S. dollar. Treasury yields also showed little movement despite renewed tariff threats, suggesting a belief the government will not follow through on those threats.

Key points

• Key points:
• June CPI pointed to still limited tariff-related effects on prices, but renewed tariff delays added uncertainty on when the Fed might resume easing, likely pushing cuts further out.
• Long-term yields briefly spiked last week, following media rumors that Trump intended to remove Powell, but Trump’s quick rejection brought yields back near last month’s levels.
• The widening of the 30y-10y yield spread suggests that those reactions, though short-lived, are likely contributing to a gradual buildup of deeper concerns among market participants.
• Although far from de-anchoring, the recent rise of market-based long-term inflation expectations will likely contribute to the Fed's continued caution.
• In early July, the futures market priced in up to a 60% chance of at least three rate cuts this year. They have since declined to ~20%, roughly where they stood a month ago.

Geographies

Topics

Tags