Fed Rate Pause Geopolitical Inflation
The Federal Reserve may reconsider aggressive rate hikes due to the impact of inflation from the geopolitical crisis.
Attention is building fast — up 6pp of coverage share over the last 3 days, now 8.7% of US10Y coverage.
There is speculation that the Federal Reserve might slow down its rate hikes due to inflationary pressures stemming from geopolitical tensions. The division among policymakers, as seen in recent FOMC minutes, suggests a possible shift towards a more cautious approach to monetary policy.
Expectations of a less aggressive Fed can lower bond yields, reducing borrowing costs and potentially boosting economic activity. This can lead to increased risk-taking in financial markets, as investors seek higher returns in equities and other risk assets.
Mainstream financial press is carrying this — attention has broadened beyond specialist outlets.
"The minutes of the June 16-17 Federal Open Market Committee meeting showed an even divide between one body of policymakers largely content to leave rates where they are and another viewing higher borrowing costs as the appropriate path."
"The Fed's dot plot suggested rate increases rather than cuts, with nine of 18 voting members projecting at least one rate hike before the end of 2026. The central bank's PCE inflation projection for year-end increased from 2.7% to 3.6%, pointing to an outlook where the Fed may need to tolerate a longer period of restrictive policy."
"The committee unanimously decided to hold the rates steady at 3.5-3.75 per cent, noting the need to fight persistently high inflation and bring it down to the Fed's comfort level of 2 per cent."
"The move in oil has a clear impact on the bond market. Treasury yields surged as traders boosted Federal Reserve interest rate hike expectations on worries that rising oil prices will keep inflation elevated. The 10-year Treasury yield rose to roughly 4.58%, putting it within striking distance of its May high."
"In May, the annualized US inflation rate jumped to 4.2%, a three-year high and more than double the Federal Reserve's target inflation rate of 2%. Others indicated rates would need to be increased before the end of the year to deal with rising inflation, according to the minutes."
"Warsh struck a hawkish tone during his first press conference — repeatedly emphasizing the Fed's inflation-control mandate while scarcely referencing its maximum-employment goals. Investors now broadly expect at least one rate hike this year."
"U.S. stocks fell for a second straight session on Wednesday as surging energy prices rekindled inflation fears and pushed Treasury yields higher. The 10-year Treasury yield rose for a second session, trading near 4.6%, as investors repriced inflation risk. Markets now assign roughly a 66% chance of a Fed rate hike in September, up from 62% on Tuesday."
"The Atlanta Federal Reserve's model is estimating gross domestic product increasing at a 1.2% annualized rate in the second quarter, partly reflecting what so far appears to be a wider goods trade deficit. Suppliers were still taking longer to deliver inputs to businesses in June. In this instance, though, strained supply chains do not reflect strong demand."
"VK Vijayakumar, Chief Investment Strategist at Geojit Investments, believes that with US inflation remaining high (core inflation at 2.9%) and bond yields (US 10-year yield at 4.46%) inching up, there are expectations of rate hikes from the Fed."
"However, the likelihood of a hike before the end of the year remains... the new Fed Chair emphasising the need for the Fed 'to re-commit to deliver price stability'."