Treasury yields, which move opposite prices, had fallen sharply Wednesday after core consumer price index inflation came in weaker than forecast for a third month. The decline in year-over-year inflation to 1.7 percent spooked the market and raised more doubts over whether the Fed can hike rates as it forecasts. Retail sales data was also weak.
In the fed funds futures market, the expectations for another rate hike this year were at about 35 percent, down from 50 percent Tuesday but up from 25 percent just before the Fed’s statement.
Yields on the 10-year Treasury note remained near low levels of about 2.13 percent, but the 2-year yield, reflecting the Fed’s rate hikes, rose after the Fed hiked rates to as high as 1.35 percent.
“The bond market is saying if they still tighten, it’s going to be a problem,” said John Briggs, head of strategy at NatWest Markets.
The Fed also cited a strengthening consumer and business spending.
“I do wonder if there’s a difference in views on the economy developing between the Fed and the markets,” said Ed Keon of QMA.
“The Fed pointed to a somewhat strengthening consumer,” Keon said. “They’re just not looking at the same numbers that I’m looking at, which seem to be coming in a tad weaker. Comparing Q1 to Q2 may look like it’s getting a little stronger, but I’m not sure I see consumption accelerating.”
The Fed has been in a quandary with strong hiring and low unemployment but a batch of weak inflation data.
“The market’s expectations about inflation may be proven wrong but they would rather be proven wrong than believing whatever the hell the Fed is saying,” said Memani.
“The current scenario of low employment and no inflation is actually reasonably positive for growth and reasonably positive for the stock market,” he said. “Stock markets are definitely fully priced, but if the economy continues to grow at a 2 percent pace and inflation remains low I think stocks can go up with the growth in nominal GDP.”
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