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The 2-year Treasury yield carved out another three-month high on Wednesday after Federal Reserve officials indicated more rate hikes are likely on the way for later this year.
What happened
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.688%
rose 1.3 basis points to 4.707% from 4.694% on Tuesday. The rate is still at its highest level since March 9, based on 3 p.m. figures from Dow Jones Market Data. The 2-year yield is up five of the past seven trading sessions. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.795%
declined 4.2 basis points to 3.796% from 3.838% Tuesday afternoon. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.880%
dropped 5.9 basis points to 3.881% after factoring in reopening levels. Wednesday’s level is the lowest since June 6.
What drove markets
Projections released on Wednesday showed that the median estimate of policy makers for the fed funds rate by year-end is 5.6%, exceeding most expectations. Fed officials lifted their expectations for the so-called 2023 median dot in their forecasts, even though they left their main interest-rate target unchanged at between 5%-5.25% for June.
See: Fed skips June interest-rate hike, but points to two more increases this year
In his post-meeting press conference, Fed Chairman Jerome Powell said “the process of getting inflation back to 2% has a long way to go” and that policy makers are “strongly committed” to that objective. He also said policy makers haven’t made any decisions about their July meeting.
After the Fed’s policy announcement, fed funds futures traders saw a 59.9% chance of a July rate hike that would take the fed funds rate target to between 5.25%-5.5%, according to the CME FedWatch Tool.
See also: Fed sees resilient economy and low unemployment prolonging high inflation
Data released ahead of the Fed’s decision on Wednesday showed that U.S. wholesale prices fell 0.3% in May, the third drop in the past four months. The report suggested that inflation has room to decline further. However, Tuesday’s consumer price index report for May revealed that the core rate of inflation, which strips out food and energy, increased 5.3% over the past 12 months —- and core readings are what the Fed cares most about.
What analysts are saying
“The Fed sees better and stronger economic growth and higher inflation,” said Tom Garretson, senior portfolio strategist at RBC Wealth Management in Minneapolis. “Markets were looking for, at most, one more rate hike this year so they were definitely caught off guard by the idea that the Fed thinks it needs to raise rates twice more in 2023,” he said via phone.
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