Trump Pressures Fed, Market Reduces Cut Expectations
Bond market participants are trimming expectations for a Federal Reserve interest rate cut this year as surging oil prices rekindle inflation concerns. Trading in interest rate swaps tied to Thursday's Fed meeting schedule reflects only about 20 bps of easing through the end of the year, down from about 30 bps at the end of Wednesday.
This change contrasts with the market's position on February 28, when swaps were still fully factoring in at least 50 bps of easing, equivalent to two 25 bps cuts. Investors have been demanding higher yields since the US attack on Iran on February 28, as the market views rising oil prices as risking a resurgence in inflation.
Bond market pressure continued on Thursday (March 12), with the 2-year Treasury yield rising 10 bps to 3.76%. The yield increase reflects a re-pricing of interest rates for the risk of energy inflation and signals that the window for a rate cut is likely to narrow if price pressures persist.
Politically, President Donald Trump has openly called for an immediate interest rate cut. Trump criticized Fed Chairman Jerome Powell on social media and demanded the central bank lower interest rates without waiting for the next scheduled meeting, further highlighting the independence of monetary policy amid market volatility.
As a result, the market is now more sensitive to oil movements as a determinant of short-term inflation and the Fed's interest rate path, which can maintain volatility in bonds and the dollar. At the same time, the dynamics of the Fed's leadership are also under scrutiny, as Trump's preferred candidate to lead the Fed, Kevin Warsh, is still awaiting Senate confirmation.
Source: Newsmaker.id
