The U.S. Treasury building in Washington, D.C. Photographer: Al Drago/Bloomberg.
Wall Street traders dialed back expectations for an interest rate cut next month, sending Treasury yields higher, after fresh data on wholesale prices signaled tariffs are pushing up inflation.
Yields on short-term Treasuries, which tend to track expectations for monetary policy, rose sharply today, with the two-year notes climbing 6 basis point (bps) to 3.73 percent. The benchmark 10-year yield jumped, and the dollar gained against a basket of peers.
The higher-than-expected increase in the producer price index (PPI)—which suggests companies are passing along elevated import costs tied to tariffs—halted a Treasuries rally and surprised investors. Traders had piled into bets on a September rate cut, with some wagering on a 50 bps move, after a largely benign report on consumer prices this week and comments from Treasury Secretary Scott Bessent in which he said policymakers could bring down borrowing costs as much as 1.5 percentage points.
“Today’s PPI makes you take a step back and just re-assess,” said Priya Misra, a portfolio manager at JPMorgan Asset Management. “We’re in the midst of a stagflationary shock.”
Interest rate swaps still show anticipation of at least half a percentage point of rate reductions by the end of the year, but the odds of a September cut fell.
Fed officials, who last month left rates unchanged in a range of 4.25 percent to 4.5 percent, have indicated they are weighing mixed signals from the economy ahead of their policy meeting on September 16 and 17. St. Louis Fed President Alberto Musalem said today that it is too early to decide whether he will support a cut.
Investors are now watching for clues from the Fed’s annual gathering in Jackson Hole, Wyoming, where Chair Jerome Powell is set to speak later this month. President Donald Trump has repeatedly criticized Powell for failing to bring down borrowing costs. Bessent said today that while he isn’t calling for the Fed to lower rates, economic models suggest there’s room for rates to come down 150 bps, to a “neutral” level at which policy is neither restraining nor stimulating the economy.
What Bloomberg strategists say...“While yields are rising across the curve after a pickup in July PPI figures, the move appears to be led by mild profit-taking after they declined earlier this week.”— Alyce Andres, Macro Strategist, Markets Live |
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