Fixed income investors with exposure to rate-sensitive bond ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) have a heavy load of data weighing on them this week as the FOMC decision was delivered yesterday, the PCE report is released tomorrow, and the first Trump tariffs are due to be implemented as early as Saturday.
As was widely expected, the Federal Reserve Open Market Committee (FOMC) left rates unchanged yesterday as the Fed takes a wait-and-see, data-dependent approach to inflation.
In a press conference following Wednesday’s FOMC decision, Fed Chair Jerome Powell said, “We’re not in a hurry to make adjustments to policy” but countered that remark by saying, “We do expect to see further progress in inflation.”
Powell’s words appeared to calm the bond market as TLT’s price rose off the day’s lows.
The next test for rates and inflation comes with Friday’s Personal Consumption Expenditures Price Index (PCE), the Fed’s preferred inflation gauge, which is expected to report the year-over-year headline rate at 2.6%, a bit hotter than the previous 2.4%.
Meanwhile, the first round of tariffs is expected to begin Feb. 1, with 25% levies on Mexico and Canada, as Trump also mulls a 10% tariff on Chinese goods.
Any numbers lower than expectations will almost certainly push yields lower and bond ETF prices higher, as rates and prices have an inverse relationship. Hotter inflation readings will have the opposite effect as fixed-income investors will grow increasingly nervous about the path of inflation and interest rates in the months ahead.
While the PCE, as well as the Consumer Price Index (CPI), provides meaningful context on historical inflation data, the numbers are backward-looking. Thus, any effects on inflation from Trump’s tariff and immigration policies won’t appear in the data, further underscoring the Fed’s need to take a wait-and-see approach to monetary policy in the months ahead.
The CPI FedWatch tool, which tracks the probabilities of changes to the Fed rate, as implied by 30-Day Fed Funds futures prices, predicts the next best chance for a rate cut is at the Fed’s June meeting.
