The probability of a U.S. Federal Reserve rate cut has dropped below 50% following comments from Fed Governor Christopher Waller. This shift in expectations comes after U.S. Fed Chair Kevin Warsh highlighted potential rate hikes at upcoming meetings, emphasizing the complexity of the monetary policy path.
Governor Waller stated his support for maintaining the current Fed funds target rate if inflationary pressures ease, but he remains open to a rate hike if inflation does not moderate. Despite headline inflation at 3.7% and core inflation at 3.3% in July, Waller noted that underlying trends are better than these figures suggest.
The benchmark U.S. Treasury yield has pulled back for the second consecutive session after reaching its highest level since November 2023. This comes amid a global bond selloff driven by inflation fears, rising debt, and geopolitical uncertainties.
“If this continues in the data over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting.”
Christopher Waller, U.S. Federal Reserve Governor
Earlier this week, the yield on 10-year U.S. Treasury notes climbed to a near three-year high of 4.81%. Japan's 10-year yield surpassed 3% for the first time in 30 years, while Australia's 10-year government bond yield rose to 5.198%, the highest in over 15 years.
India has also felt the impact of the global selloff, with the 10-year Indian government bond yield briefly crossing 7% for the first time in three months. Meanwhile, Britain's 30-year borrowing costs have reached 30-year highs, and German and French 10-year yields have hit levels last seen in 2011 and 2008, respectively.
Background
The recent developments in bond yields and rate expectations underscore the ongoing volatility in global financial markets. Investors are closely monitoring upcoming inflation reports, which will provide critical data for the Fed's next meeting.
Looking ahead, market participants should watch for the upcoming consumer and producer price indexes from the Bureau of Labor Statistics, as these will heavily influence the Fed's decision-making process.
