Bond market, inflation expectations… The US 10-year nominal bond yields fell to 2.74%, aided by the moderation of inflation expectations for the long-term. The decline in 10-year inflation expectations supports the situation of real returns. Nominal yields, on the other hand, have been on a downward trend for the past few days. Although the Fed's concern for inflation is very clear in this regard, the situation that takes into account the recession possibilities provides a certain amount of space and the 10-years remain below the 3% band for now. One component will be whether the Fed will put on hold after September or continue to raise interest rates in the traditional band.
Upward pressure on inflation… FOMC participants largely agree that inflation risks are on the upside. Even more worrisome for monetary policymakers, the sources of upward inflation pressure are long and varied, such as continued supply bottlenecks, rising commodity prices, and rising nominal wages. Considering these effects, the FOMC is expected to increase the federal funds rate by 50 basis points at both the June and July meetings. This band can be continued in the same way at the September meeting. Markets are fully priced for 50 basis point rate hikes in June and July, and the band after September will be decided within the framework of inflation momentum and expectations.
Comparison of US 10-year nominal and real yields… Source: Bloomberg
Conclusion? In fact, there is a reasonable degree of clarity surrounding the short-term outlook for monetary policy. It is still unclear how much monetary policy tightening will be required to return inflation to the 2% target. FOMC members intend to move the fed funds rate "quickly" towards a perceived neutral interest rate of between 2% and 2.5%. Although the issue of inflation is losing momentum in terms of goods inflation, there is now services inflation gaining momentum. The Fed will want to see a cooling in these details to curb its pace and may allow unemployment to rise a bit until that happens.
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