US | Long-term rates are likely past their peak

However, the Fed is not convinced that inflation is “on a sustained downward path”, and thus, it will try to reverse the recent downshift of the yield curve.

Key points

• Key points:
• The Fed shifted gears down with a 50bp rate hike, but outlined a more hawkish outlook as cooling goods inflation meets sticky services inflation and a still hot labor market.
• Reversing the recent downward shift in the yield curve might prove difficult with cooling inflation and the scenario of a “short and shallow” recession becoming less and less likely.
• Both the 10y-2y and 10y-3m yield spreads have kept falling, signaling increasing odds of a more severe recession while FOMC members remain (only publicly?) hopeful on the odds of a soft landing.
• The futures market did not buy the idea that the Fed will raise the fed funds rate above 5%, and expects a much sooner start for the rate cut cycle than signaled by the FOMC.
• Powell downplayed the recent easing of financial conditions as the “focus is not on short-term moves but on persistent moves”: a strong hint that the Fed will aim for a reversal.

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