The Fed Just Can’t Stop Bond Traders’ Wishful Thinking
Despite pointed remarks by central bank officials, debt traders seem wedded to the idea of a pivot this year.
Cleveland Fed President Loretta Mester is on cleanup duty.
Photographer: Melissa Lyttle/Bloomberg
Ever since traders erroneously interpreted Federal Reserve Chair Jerome Powell’s July press conference as dovish, US short-term bond yields have completed a round trip, with the market now essentially back to where it started a week ago. That gets bonds closer to realistic pricing in the face of the worst inflation in 40 years, but much more upheaval could be in store.
Consider the developments of the past day. The yield on two-year Treasuries surged 20 basis points on Tuesday, the most since June 10, as a succession of Fed speakers helped the market realize it had become overly optimistic about the prospects of a shift in monetary policy. Most notably, San Francisco Fed President Mary Daly said the Fed was “nowhere near” wrapping up the war on inflation, while Cleveland Fed President Loretta Mester said, “We need to see really compelling evidence that inflation is moving down,” adding that “my view is that we haven’t seen that yet.”