Yields Take a Tumble as Bullard Foresees Fed Cutting Rates

James Bullard, former St. Louis Federal Reserve President, made a bold prediction that interest rates could see a downward shift as early as March. He expressed his views in a recent interview with the Wall Street Journal, outlining that this move could happen even before inflation reaches the central bank’s intended target of 2%.

“Inflation on a 12-month core basis (excluding food and energy prices), you could get to 2% by Q3 of this year,” he shared in the WSJ’s Take on the Week podcast.

Highlighting statistics, Bullard pointed out the personal consumption expenditures price index, the Fed’s preferred inflation metric, which dropped to 2.6% in November from the preceding year. The next update on this is anticipated on Friday.

Cautioning against complacency, Bullard warned of a potential challenge for the Fed. “They don’t want to get into the second half of 2024, and inflation’s already at 2% and you still haven’t moved the policy, right? That would be too late.”

Responding to Bullard’s remarks, yields in the market experienced a decline. The U.S. 10-year Treasury yield fell by 4 basis points to 4.10%, while the 2-year yield was down 6 bps at 4.32%.

Market participants had been scaling back on expectations of rate cuts starting in March, following the release of the Fed’s minutes for its December policy meeting, which highlighted concerns around a potential resurgence in inflation.

With an eye on the future, Bullard issued a stark warning that if inflation hovers between 2% and 2.5% without any corresponding rate cuts, the Fed may be compelled to adopt a more aggressive stance, perhaps resorting to 50 basis points or similar moves. Such decisions, Bullard cautioned, could present significant challenges.

“With the jobs market remaining tight and inflation still above target, we continue to take the view that May is the more likely start point for Fed easing versus the market’s pricing of March,” shared ING economists.