The Fed has “already told us that they’ve reached the end of rate hikes and that they’ve revealed a bias to cut rates,” said Stephen Bartolini, a fixed-income portfolio manager at T. Rowe Price. “So they’ll be looking at the PCE because the further PCE moves toward their forecast or even through it, then they can increase their timing and pace of rate cuts.”
Across all of 2024, swaps traders are penciling in at least six quarter-point rate reductions — more than twice as much as Fed officials signaled in December in their last round of quarterly forecasts. Since then, evidence of easing in labor-market tightness and inflation has ginned up traders to remain locked into bets for aggressive easing this year — though the exact degree of total reduction has ebbed and flowed around key data releases.
A Treasury auction on Thursday of new 10-year inflation-protected bonds has the potential to shed light on investor attitudes. Their yields — at around 1.75%, though about 75 basis points off last year’s peak — “remain elevated and above most estimates of neutral real rates,” Barclays strategists said in a note.
The 2.25 percentage-point gap between the 10-year TIPS yield and the 10-year Treasury yield represents the average CPI inflation rate needed over time to equalize their returns. Accounting for the difference between CPI inflation and the separate inflation gauge the Fed aims to average around 2%, that’s a vote of confidence in the central bank’s policies.
This article was provided by Bloomberg News.