Bond Market Doubts September Fed Rate Cut After Strong PPI Data

Bond market signals indicate that a Federal Reserve rate cut in September is no longer considered certain, despite earlier market expectations. This shift reflects evolving inflationary pressures and uncertainty in economic data. Recent developments, particularly the July Producer Price Index (PPI) report, have raised concerns that inflation may persist longer than anticipated, casting doubt on the Fed’s readiness to ease monetary policy [3].

The PPI report showed a 0.9% month-over-month increase in July, far exceeding the expected 0.2% rise and marking the largest gain since June 2022. On an annual basis, PPI rose to 3.3%, up from 2.4% in June, while core PPI climbed to 3.7% from 2.6%. The sharp upward revision highlights the inflationary impact of recent tariff policies and suggests that price pressures are moving further along supply chains [3].

In response to the data, Treasury yields surged across the curve. The 2-year Treasury yield rose by 5.7 basis points to 3.73%, and the 10-year yield increased by 5.1 basis points to 4.29%. These movements signal that bond buyers are pricing in the potential for higher inflation down the road, reducing their confidence in an imminent rate cut [3].

Wall Street analysts are now reconsidering their assumptions about the September meeting. UBS warned that trade taxes progress down supply chains over months, meaning inflation could soon affect consumer prices more directly. Deutsche Bank’s Jim Reid and his team noted that the PPI spike has led to a "hawkish repricing" of Fed expectations, implying that policymakers may take a more cautious approach [3].

Two Fed officials have also voiced caution. St. Louis Fed President Musalem stated it was “too early to say exactly what policy I will be able to support” in September and ruled out a 50 basis point cut as unsupported by current economic conditions. San Francisco Fed President Daly echoed this, saying she did not see a need for a 50 basis point reduction either [3].

Despite this, the CME Fed Funds futures market still prices in a 90%-plus chance of a 25 basis point cut in September. Equity investors have continued to buy on the expectation of a rate cut, with the S&P 500 trading near its all-time high and futures remaining flat ahead of the open. However, if the Fed surprises the market by holding rates steady or delaying cuts, it could lead to significant volatility [3].

The broader market context shows mixed global equity performance. Asian markets were stronger, with Japan’s Nikkei 225 hitting a new record high, while European and U.S. markets remained subdued. Bitcoin, meanwhile, fell below $120,000 [3].

Analysts caution that the Fed remains firmly data-dependent, with Chair Jerome Powell emphasizing that decisions will be based on incoming economic signals. Recent readings, including the strong PPI, complicate the case for aggressive easing. While some policymakers, including Treasury Secretary Scott Bessent, have called for a larger cut, the bond market remains skeptical [2].

Mortgage rates, currently above 6.5% for 30-year fixed-rate products, reflect this uncertainty. Analysts argue that rates are primarily driven by bond market expectations rather than direct Fed policy. Aggressive rate cuts can sometimes trigger pushback from investors, who may raise yields if they perceive the economy as stronger than the Fed acknowledges [2].

As the Fed approaches its September meeting, the evolving inflation picture and mixed economic signals underscore the difficulty of balancing the risk of over-tightening with the need to control price pressures. What was once seen as a near-certainty is now being reevaluated, with traders and analysts adjusting their forecasts in response to new data. The bond market’s shifting stance highlights the importance of real-time indicators in shaping monetary policy and its impact on global financial markets [3].

Source:

[1] The Fed's Dovish Pivot and the Strategic Case for Treasury Entry (https://www.ainvest.com/news/fed-dovish-pivot-strategic-case-treasury-entry-rate-cuts-2508/)

[2] Federal Reserve's Cuts May Not Lower Mortgage Rates, Analysts Warn (https://www.investopedia.com/federal-reserve-s-rate-cuts-may-not-lower-mortgage-rates-analysts-warn-11791234)

[3] Hot July PPI Data Dampens Fed Rate Cut Hopes (https://www.ainvest.com/news/hot-july-ppi-data-dampens-fed-rate-cut-hopes-2508/)

[4] Treasury Secretary Bessent Calls for Huge Rate Cuts (https://www.thetruthaboutmortgage.com/treasury-secretary-bessent-calls-for-huge-rate-cuts-what-will-mortgage-rates-do/)