The largest bond market in the world took another beating, with the two-year yield momentarily rising to 5% following Jerome Powell’s indication that officials are not in a rush to lower interest rates. 

Rate Suspension

Treasury rates surged to all-time highs in 2024 after the head of the Federal Reserve stated that it will probably take more time to feel confident about inflation and that it is appropriate to give restrictive policies time to take effect.

The dollar experienced its strongest five-day increase since October 2022, while the record-low stock market decline continued.

Powell’s comments signaled a change in tone following the third consecutive month that a crucial inflation indicator beat projections.

Powell’s remarks, according to Krishna Guha at Evercore, “make it clear the Fed is now looking beyond June.”

“His comments align with ‘plan B’ as announced in July for the two rate reductions this year, but they raise the possibility that prolonged dissatisfaction with inflation could result in a longer period of rate suspension.”

The S&P 500 fell to approximately 5,050. As a result of higher-than-expected charge-off for failed loans, Bank of America Corp. fell, but Morgan Stanley gained as traders produced strong revenue.

Following its findings, UnitedHealth Group Inc. soared. The US 10- year yield increased to 4.67%, up seven basis points.

Fed Rate Cuts

Traders are increasingly skeptical that there will even be rate decreases in 2024, despite beginning the year by pricing in as many as six rate cuts, or 1.5 percentage points of easing.

Following Powell’s remark on inflation, market-implied expectations for Fed rate cuts—which have fallen precipitously over the last two weeks—continued to fall.

For the entire year, almost 40 basis points of easing were still factored in. Andrew Brenner of Nat Alliance Securities stated, “If you were looking for bits of easing or dovish talk from Powell, you did not miss it—he did not give it.”

According to Jamie Cox of Harris Financial Group, the Fed has a “free pass” to keep interest rates at current levels as long as the labor market is robust, consumption is unaffected, and the economy isn’t seeing the usual fallout from raising rates abruptly.

Cox continued, “Markets should concentrate on the fact that rates are sufficiently restrictive, rather than how many cuts are in the works.”

As far as the bond market is concerned, the inflation outlook has not gotten worse, says Renaissance Macro Research’s Neil Dutta.