Following more than a year of aggressive rate hikes, central banks appear on the verge of ending their tightening cycles as headline inflation declines (although remains above target) with weaker energy costs and price increases from 2022 falling out of the calculation. While both the U.S. Federal Reserve (Fed) and European Central Bank (ECB) raised policy rates in late July, in their respective press conferences Chair Powell and President Lagarde declined to commit to additional rate hikes later in the year.
In response, markets moved from pricing one more Fed hike this year to leaving rates unchanged after the July meeting, although there is still some probability of either cuts or hikes later in the year. More likely, however, is a scenario in which the Fed remains on hold through the remainder of the year and then considers cutting rates in 2024, if inflation conditions permit.
In contrast, the Bank of Japan announced more flexibility in its yield curve control program in late July, effectively allowing a higher upper range for the 10-year JGB yield to trade. Rate hikes over the course of Q2 and into early Q3 have contributed to modest upward pressure on 10-year yields in the U.S., but little changed in Europe. Yield curves remain inverted, which has historically preceded recessions in the U.S.
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