Publications

We identify the main drivers of key financial market asset price dynamics, including the Euro-dollar exchange rate and the Bund-US Treasury yield spread, using a sign-restricted SVAR model. The model also facilitates the extraction of a high frequency global macro-financial conditions indicator.

While directionally consistent with our expectations, the SEP adjustments (higher inflation, weaker growth, and a slightly higher unemployment rate) were not sufficient to alter the median fed funds rate projection for end-2025, which remains at 3.9% (two cuts).

A notable development in recent weeks has been the rise in the 30-year Treasury yield, likely driven by growing concerns over U.S. fiscal sustainability and reduced global appetite for U.S. Treasuries as bond investors want to be rewarded for higher risks.

Recent softness in sentiment is not enough to shift policy as solid demand and stable jobs data support a continued pause. Attention now turns to assess whether this cautious pause could extend deeper into the second half of the year.

While Trump recently suggested he would not try to remove Powell from his position following last week’s intensified criticism, such threats to institutions underpinning the dollar’s global dominance pose a serious risk to the future of the global financial system.

While short-term inflation expectations have increased, the Fed doesn't seem troubled for now because “most measures of longer-term expectations remain consistent with [the Fed’s] 2% inflation goal.”

We do not expect either the statement or Powell to hint at a possible rate cut soon amid heightened downside risks to growth and instead expect both to convey that amid lingering uncertainty the Fed remains comfortable in its current wait-and-see mode and is in “no hurry” to resume the rate cut cycle.

A recent string of weak data together with the postponement of tariffs and a less worrisome fiscal bill than feared likely eased market participants’ bets of a scenario in which the Fed keeps interest rates at their current level for the whole year.