Soft Inflation Data Fails to Dent Expectations of Further Rate Hikes
The US inflation rate for August came in softer than expected, but this did not mean that the Treasury market forgot about its concerns about inflation. The Consumer Price Index (CPI) rose 0.3% in August and 3.4% from a year earlier, while the Personal Consumption Expenditures (PCE) excluding food and energy increased 0.2% for the month and 3.0% over 12 months.
The softer inflation data reduced expectations for another Federal Reserve rate increase at its October meeting, with CME FedWatch pricing showing the implied probability of an October rate increase falling to roughly 37% on September 30 from around 71% a week earlier.
However, long-term Treasury yields remained elevated, reflecting not only concerns about inflation but also resilient growth and energy prices. The 10-year Treasury yield rose to 5.29% by the end of September, while the Dollar Index remained near a two-month high at around 101.48 in early October trading.
New York Fed President John Williams said that after September's increase, there was 'no need for urgency' and that policymakers had time to gather more information before deciding on further rate hikes. Fed Governor Michael Barr also emphasized the ongoing concern about inflation, while noting the possibility of a higher equilibrium interest rate due to the AI investment boom.