Bond market sees inflation as a wild card for easing timetable at Fed meeting

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Market reaction could hinge on hawkish signals

While bond investors expect the U.S. Federal Reserve to keep rates unchanged at its policy announcement on Wednesday, the market reaction could hinge on what Fed officials indicate about stubborn inflation and if their signals get more hawkish about the timing and extent of any easing this year.

“What will be really interesting to see is if the Fed is still comfortable in the dot plots to still be showing the possibility of three rate cuts for this year,” said Matt Eagan, head of the full direction team at Loomis, Sayles & Co. “Or will they start to say we’ve got to push back against this a little bit longer.”

Inflation has since picked up, though analysts note that recent hotter-than-expected consumer and producer price index reports likely reflected seasonal factors. An unexpected uptick in unemployment last month could keep the Fed circumspect on growth, offsetting some of the inflation concerns. Powell in November cited financial conditions when higher Treasury bond yields, mortgage rates and other financing costs were having a tightening impact on the economy. His comments were interpreted as potentially leading the Fed to hike rates less than expected.The Fed may also signal that it is getting closer to tapering its quantitative tightening program, in which it allows bonds to roll off its balance sheet without replacement.

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