Publications

The renewed escalation in Iran has pushed Treasury yields back to early-2025 levels, as markets again weigh the impact of higher oil prices on both the inflation and the economic growth outlook.

The Eurozone and the United States are facing inflationary pressures that extend beyond energy, forcing the ECB and the Fed to raise their inflation forecasts. The central banks are shifting their course with varying degrees of determination.

The hurdle for additional easing is now considerably higher than it was earlier this year, while the possibility of future rate hikes can no longer be dismissed if inflation fails to resume its path toward target.

The FOMC will most likely keep the fed funds target range unchanged at 3.50-3.75% and shift to a more two-sided approach to future policy guidance. The case for maintaining an easing bias has weakened materially as labor market downside risks appear to have diminished, while inflation progress has become less convincing.

Three voting regional presidents, while supporting the decision to hold rates steady today, did not back the statement’s easing bias, signaling a growing view within the Committee that the scope to resume rate cuts this year is becoming increasingly limited.

The Fed approaches this meeting in a somewhat more benign geopolitical environment than it did in March, but still-sticky core PCE inflation, alongside March’s upside surprises in retail sales and nonfarm payrolls, may push the Committee toward a somewhat more hawkish tone at the margin.

Short-term yields have declined as markets reassess the Fed outlook and move away from pricing rate hikes this year, with the 2-year leading the adjustment and the long end moving more modestly.