The Fed's 2025 Rate Path: Inflation Data and Market Expectations

Inflation Data and Fed's Preferred Indicator

• 📊 Producer Price Index (PPI) shows inflation under control, with headline and core figures at 0.1%, better than expectations.
• 📉 This follows a tame Consumer Price Index (CPI) report, leading to expectations of a modest increase in the PCE price index, the Fed's preferred inflation indicator.
• 💡 Estimates for the PCE price index range from 0.1% to 0.2%, indicating a generally subdued inflation trend.

The "Tariff Mystery" and Inflation Pass-Through

• ❓ Forecasters are puzzled by the mystery of where and when tariffs will increase inflation, and if they will reach consumers.
• 🧩 One idea suggests tariffs might be absorbed into profits by exporters, wholesalers, and retailers, with minimal pass-through to consumers.
• ⚠️ Alternatively, price declines in other goods due to economic weakness could offset tariff impacts, as seen with airline fares.
• ⏳ There's also the possibility that tariff impacts are yet to fully materialize.

Market Expectations for Rate Cuts

• 📈 Markets are increasingly confident in two rate cuts this year, with a roughly 75% probability for cuts in September and December.
• 🗓️ Probabilities for a July rate cut remain low, suggesting the consensus is for the Fed to wait for more clarity on the tariff impact.
• ⏳ The market anticipates the Fed will wait a couple of meetings to be sure the "tariff mystery" is resolved favorably before implementing cuts.

Presidential Comments on Interest Rates and Tariffs

• 🗣️ The President commented on Fed Chair Powell, noting that a 1% reduction in interest rates would save approximately $300 billion annually.
• 🇪🇺 He pointed out that Europe has implemented 10 rate cuts, while the US has had none.
• 💰 The President expressed a desire for lower interest rates to reduce debt servicing costs, suggesting a potential conflict with current tariff policies.

Market Reactions and Long-Term Yields

• 📉 The 2-year Treasury yield is reacting to Fed expectations, while the 10-year yield has shown an upward trend.
• ⚠️ The long end of the market does not seem to be anticipating significant rate cuts, possibly due to lingering inflation concerns.
• 📊 The 10-year Treasury yield appears to be range-bound between 4.30%-4.35% at the low end and 4.50% at the top end.