I ran a poll on Friday asking what looked like a theoretical question but now it’s looking more like we might get a chance to find out.
The odds of a near-term rate hike have been wiped out since today’s CPI report and now it’s not looking like a cut until June.
The trend in economic data so far in 2024 has been strength and what if that continues? A couple more CPI reports like today and that we will be having a very different conversation about what comes next from the Fed.
My simple answer to the question above is against the consensus; I think rates would go lower. But the real answer is ‘it depends’.
If Powell were to come out tomorrow and indicate the rate hiking cycle isn’t over, yields would fall. That’s because it would signal a determination to crush inflation, even at the expense of growth. It would signal a rising possibility of a recession and there would be a rush into the safety of long-dated bonds (but not the short end).
However if a scenario developed where the Fed waited too long to address higher inflation and only indicated a slight hiking bias, then the market might see a Fed that’s not committed to fight inflation and a bigger inflation (and credibility problem).
In the middle are hundreds of little permutations based on what might be happening with deficits, the global economy and all the other things that go into yields but — overall — I would be much more comfortable owning long-dated bonds if the Fed brought the hammer down on inflation.