| Interest Rate Market Snapshot | ||||||
| Federal Funds | SOFR | 2Y Treasury | 5Y Treasury | 7Y Treasury | 10Y Treasury | |
| 4.33% | 4.32% | 3.98% | 4.06% | 4.18% | 4.30% | |
Inflation offers some relief
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Tariff fears are being set aside for tomorrow because today is all about celebrating the small wins
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The February Consumer Price Index came in lower across the board this morning
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Headline CPI: 0.2% monthly change vs 0.3% expected, lowering the annual inflation rate to 2.8%
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Core CPI: 0.2% vs 0.3% expected, bringing the annual rate down to 3.1%
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It’s not like we made huge strides toward the Fed’s 2% target, but given the uncertainty and noise that tariffs have created, it’s a win nonetheless
SOURCE: BLOOMBERG
Behind the numbers:
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Food: Modest 0.2% increase in overall food costs last month, with 4 of the 6 major grocery store categories experiencing higher prices. Eggs posted yet another robust 10% increase and are up 58% year-over-year from February 2024.
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Energy: Mixed results with lower gasoline and fuel oil offset by higher electricity and gas services. Overall, energy is still providing a disinflationary impulse on the overall inflation index (for now)
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Goods: Slightly higher used car prices but slightly lower new car prices. Some nuances in the other categories, but Goods are still pulling down overall CPI numbers as a whole (for now)
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Services: Shelter again accounted for nearly half of the overall monthly increase despite rising a modest 0.28% last month. Elsewhere, a 4% decline in airline fares was the largest monthly decrease in any category of the index last month, contributing to a slowdown in Supercore inflation from January’s 0.76% pace to just 0.22%
The Fed meets next week, and this data largely confirms market expectations: no rate changes, no meaningful shift in outlook. Until the uncertainty of tariffs clears, the Fed is likely to stay on hold
soURCE: BLOOMBERG
Market Reaction
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The rate market seems comfortable ignoring what’s in the rear-view mirror and focused instead on the impact of tariffs. Perhaps this is one of the last “good” inflation reports we get in the months ahead
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At least, that’s what the market reaction suggests. Overnight trading led to higher yields across the curve, and if you blinked right after the CPI release, you’d have missed the only pullback in rates this morning
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The 10-year is consolidating here in a range between 4.15%-4.30% and the 2-year is doing the same between 3.85%-4.00%
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We still have ~3 rate cuts priced into expectations this year, and unless the growth floor drops out, that feels a bit rich given a ‘wait and see’ Fed
sOURCE: BLOOMBERG
SOURCE: BLOOMBERG
Something I’ve been thinking about…
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Trade wars amount to a negative supply shock, simultaneously reducing growth prospects while increasing price pressures
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Usually, if the economy starts to worsen, help from the government (fiscal stimulus) and help from the Fed (interest rate cuts) can be counted on to buffer the impact
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But this time, the usual cavalry may not arrive at the first sign of economic trouble
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Trump administration officials appear willing to tolerate some short-term economic pain as the price of their agenda
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Trump, when asked about recession risk, acknowledged a “period of transition” due to his tariff policies
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Treasury Secretary Scott Bessent referred to a period of ‘detox’ as the economy is weaned from public spending, saying: “could we be seeing that this economy that we inherited starting to roll a bit? Sure.”
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And the Fed will be constrained in responding to any economic weakening with rate cuts because inflation has already been well above its target since 2021
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Powell added last week: “You want to remember the current context. We came off of very high inflation and haven’t fully returned to 2% on a sustainable basis… so we can wait, and we should wait.”
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The risk is not that Washington won’t respond at all if stagflation rears its head. It’s that the response will be slower and more restrained than we’ve become accustomed to
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The Bank of Canada echoed this sentiment this morning, explicitly stating that monetary policy “cannot offset the impacts of a trade war.” Instead, they emphasized that policy “can and must” focus on restraining inflation—suggesting there’s little room left for rate cuts
Why does this matter?
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If the Fed stays on hold longer than markets expect, today’s fixed rates are a bargain. Borrowers can lock in lower rates now rather than waiting for cuts that may not materialize until maybe 2026
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