Key facts
- Bond traders continue to price in a Federal Reserve interest rate hike by December.
- The core consumer price index increased 0.2% from April, below the 0.3% consensus forecast.
- The rate on two-year Treasury notes, sensitive to monetary policy, stood at 4.11%.
- The US dollar weakened following the release of the inflation data.
Bond traders are maintaining their expectations for a Federal Reserve interest rate hike by the end of 2026, despite a recent soft US core inflation reading. The core consumer price index, which excludes volatile food and energy prices, rose 0.2% from April, falling short of the 0.3% consensus forecast among economists. This data provides the Federal Reserve with some flexibility, potentially easing immediate pressure for rate increases.
Interest-rate swaps indicated that traders were still pricing in a rate hike by December following the inflation report. Treasury yields remained largely unchanged, with the rate on two-year notes, a bellwether for near-term monetary policy expectations, at 4.11%, a slight decrease from its pre-report level. The US dollar also experienced a decline.
Dan Carter, a senior portfolio manager at Fort Washington Investment Advisors, commented that the inflation data offers the Fed a "tiny bit of breathing room." He suggested that a hotter inflation report would have intensified pressure for rate hikes, but the current softer figures allow the central bank to adopt a "wait and see" approach.