Traders trim Fed rate cut bets after hike in US wholesale inflation
The odds of a September Fed rate cut fell to around 85 per cent from more than 100 per cent after the bigger-than-expected jump in on US wholesale prices.
NEW YORK - Wall Street traders dialled back expectations for an interest rate cut in September, sending Treasury yields higher, after a bigger-than-expected jump in US wholesale prices signalled tariffs are pushing up inflation.
Yields on short-term Treasuries, which tend to track expectations for monetary policy, rose sharply on Aug 14, with the two-year note's climbing six basis point to 3.73 per cent. The benchmark 10-year yield jumped and the US dollar gained against a basket of peers.
The hike in the producer price index – which suggests companies are passing along elevated import costs tied to tariffs – halted a Treasuries rally and surprised investors.
Traders had piled into bets on a September rate cut, with some wagering on a 50-basis-point move, after a largely benign report on consumer prices this week and comments from Treasury Secretary Scott Bessent in which he said policymakers could bring down borrowing costs as much as 1.5 percentage points.
'Today's PPI makes you take a step back and just re-assess,' said Priya Misra, a portfolio manager at JPMorgan Asset Management. 'We're in the midst of a stagflationary shock.'
Interest-rate swaps still show at least half a percentage point of rate reductions by the end of the year, but the odds of a September cut fell to around 85 per cent from more than 100 per cent before the day's developments.
Producer prices increased 0.9 per cent in July, the Aug 14 report from the Bureau of Labor Statistics showed, more than four times as much as the median economist forecast. Within the report, services costs increased 1.1 per cent. It followed a largely benign reading on consumer prices released on Aug 12.
Fed officials, who last month left rates unchanged in a range of 4.25 per cent to 4.5 per cent, have signalled they are weighing mixed signals from the economy ahead of their Sept 16-17 policy meeting. St. Louis Fed President Alberto Musalem said on Aug 14 it was too early to decide whether he will support a cut.
Investors are now watching for clues from the Fed's annual gathering in Jackson Hole, Wyoming, where chair Jerome Powell is set to speak later in August.
US President Donald Trump has repeatedly criticized Mr Powell for failing to bring down borrowing costs. Mr Bessent on Aug 14 said that while he wasn't calling for the Fed to lower rates, economic models suggest there's room for rates to come down 150 basis points to a 'neutral' level at which policy is neither restraining nor stimulating the economy. BLOOMBERG
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