The monetary policy outlook has been uncertain, but primarily in terms of the timing of the first rate cut. But that’s starting to change as the Fed funds futures price in theof a rate hike. To be clear, the implied probability of a hike is extremely low: no more than 1%. But the fact that market sentiment is pricing in any chance of a hike marks a shift.
The policy-sensitive US 2-year Treasury yield is also pricing in a lower Fed funds target rate, which is currently 5.25% to 5.50%. By contrast, theyesterday traded moderately lower at 4.91%. To be fair, the 2-year rate has been anticipating a rate cut for more than a year. In any case, this widely followed rate suggests the crowd is still erring on the side of rate cuts vs. hikes as the next policy change.
The key variable is the path of inflation. The latest numbers show renewed signs of progress with disinflation, but the latest Fedremind that while rate hikes are still a very low probability, the possibility is on the minds of policymakers, or so it appears if you read between the lines in the latest review of the May 30-April 1 FOMC meeting:
These participants saw this uncertainty as coming from the possibility that high interest rates may be having smaller effects than in the past, that longer-run equilibrium interest rates may be higher than previously thought, or that the level of potential output may be lower than estimated. Participants assessed, however, that monetary policy remained well positioned to respond to evolving economic conditions and risks to the outlook.
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