Traders Pull Back Bets on Fed Interest-Rate Cuts Before July

Traders ratcheted down their expectations for a Federal Reserve’s interest-rate cut before July, and Treasury yields soared, after a report showed that inflation remains sticky in the US.

Swaps contracts referencing the US central bank policy meetings — which as recently as mid-January fully priced in a rate cut in May and 175 basis points of easing by the end of the year — were roiled. The odds of a May cut dropped to about 32% from about 64% before the inflation data, with fewer than 90 basis points anticipated this year. The two-year Treasury yield rose as much as 17 basis points to 4.64%.

Bond investors have been counting on Fed rate cuts to put an end to the losses that accumulated over the past two years, during which the central bank tightened policy by more than five percentage points. But Fed policymakers have said they need to see additional evidence that inflation is returning to its 2% target rate before embarking on cuts.

“Inflation was surprisingly elevated in today’s report,” said Phillip Neuhart, director of Market and Economic Research at First Citizens Bank Wealth. “This makes the Fed’s job harder,” he said, adding “We continue to expect the Fed to cut the federal funds rate later this year, but today’s report casts doubt on the first cut being in the near term.”

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