A Brief Guide to What Really Matters on CPI-Fed Day

Wednesday is shaping up to be a doozy in the US bond market. Following the release of the consumer price index at 8:30 a.m. in Washington, investors will turn to the Federal Reserve’s policy rate decision at 2 p.m., which includes an update to policymakers’ carefully scrutinized economic projections. That should create plenty of volatility, but it may prove meaningless as to the ultimate trajectory of interest rates.

Over the past two and a half years, the median CPI report has been good for an 8-basis-point swing in 10-year Treasury yields, and the median Fed day has produced a 5-basis-point move (irrespective of sign). Yet, that probably understates the circus of it all, because markets have often taken off in one direction upon the release of Fed policy decisions, only to completely reverse direction moments later during Chair Jerome Powell’s post-decision press conferences. In Wednesday’s back-to-back, you could see an especially big move in one direction, or perhaps a sequence of offsetting developments that take us on a roller coaster ride to nowhere.

This sort of manic behavior won’t tell us much about the big outstanding question for the US economy: Will inflation return to the Fed’s 2% target, allowing the central bank to reduce rates before tight monetary policy causes a recession?

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