The best look at how the market is repricing the Fed curve is in two-year yields and it’s a clear picture here. They’re down 10 basis points today to the lowest since the Liberation Day spike. Beyond that you need to go all the way back to 2022 for lower yields.
At that time, the market wasn’t sure whether Trump’s tariffs would be bad for growth or spike inflation (or both). Now we’re getting indications that the growth and jobs picture is getting hit first, which is going to prompt deep rate cuts from the Fed. For the year ahead, we’re now pricing in 136 bps in easing, which would get Fed funds close to 3%.
The nightmare scenario is that the inflation from tariffs comes later and the Fed can’t cut. That’s going to make future inflation readings critical.
