The probability of a Federal Reserve (Fed) interest rate hike has risen again following the release of July personal consumption expenditures (PCE) price index data which recorded a 3.7% year-on-year increase. The reading that beat expectations, along with core PCE at 3.3%, confirms that underlying inflationary pressures in the United States have not yet fully subsided.
The Fed funds futures market is now placing a 44% probability of a rate hike at the September meeting, up from 36% before the data was released. Financial market traders are also fully confident that further monetary policy tightening will be implemented by the Fed before the end of the year.
Global financial markets are now focused on the Jackson Hole Economic Symposium in Wyoming, where Fed Chairman Kevin Warsh is scheduled to deliver a highly anticipated policy speech. Markets are looking for clues as to whether Warsh will maintain a hawkish stance to control rising borrowing costs or take a wait-and-see approach.
Market sentiment was also affected by the surprise move by the US Treasury Department to double the limit on long-term bond buybacks to $4 billion. While the move led by Scott Bessent has successfully pulled down 30-year Treasury yields from 19-year highs, it has been criticized for complicating the Fed’s efforts to curb inflation.
Currency analysts at Bank of America have warned that the US dollar is at risk ahead of the Jackson Hole speech if the Fed’s stance is interpreted as dovish. In contrast, analysts at Invesco see the resilience of economic growth, public financing deficits and the AI investment boom as continuing pressures on bond yields.
