Fed Won’t ‘Hurry’ as Inflation Runs Hot
The central bank is fighting a seemingly unremitting battle with inflation.
Yields on government debt swung wildly this week, as sturdy US jobs growth knocked down hopes that central banks will strike a dovish tone in the months ahead. The benchmark 10-year Treasury yield hit its highest level since the fall of 2023 after data last Friday showed a bigger-than-expected increase of 256,000 jobs last month. Markets later took solace in softer underlying inflation. A report on Wednesday said the core consumer price index was up 3.2% year-over-year in December after gaining 3.3% a month prior, even as headline inflation—capturing changes in food and energy costs—picked up to 2.9% from 2.7%. A combination of resilient hiring and stubborn inflation would likely make the Federal Reserve less inclined to loosen policy anytime soon. Investors now don’t anticipate another rate cut until the summer, according to interest rate futures.
Beyond the latest economic data, bond markets could be pricing in expectations that the US Treasury could pursue a rebalancing of short- and long-dated debt under Donald Trump, after the Biden administration boosted sales of T-bills to fund government spending. Fiscal uncertainty also contributed to a bond selloff across the pond. UK long-term borrowing costs jumped with the 30-year gilt yield climbing to its highest level since 1998, reflecting vulnerabilities from a weaker pound that threaten to slow the pace of rate cuts from the Bank of England. PGIM Fixed Income’s Weekly View from the Desk examines how the latest moves in developed-market rates might be a sign of market dislocations that could emerge in 2025.
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