Publications

Mid- and long-term Treasury yields have pulled back from last month’s highs amid soft inflation prints and dovish signals from Fed officials like Bowman and Waller, who have voiced support for a July rate cut.

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 signals on how the Fed now assesses the evolution of risks to its goals will draw significant attention, all eyes will be on the dot plot to see whether a majority still favors at least one rate cut this year.

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.

Amid mixed economic data and the delayed effects of recently imposed tariffs, we expect the Fed to keep the policy rate unchanged this week at its 4.25-4.50% target range; it will likely signal it has room to maintain its policy stance heading into the June meeting.

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.

Powell signaled in the Q&A two complementary factors behind unchanged interest rate projections, which still point to 50bp worth of rate cuts later this year: i) weaker growth but higher inflation which “[...] kind of balance each other out”; and ii) uncertainty.

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.