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Rate-hike odds look mispriced as inflation expectations cool

ConnectCRE says softer CPI and PPI prints have pushed inflation expectations down while interest rate futures still imply meaningful risk of a Fed hike.

Reported · Written up by our desk · Economy

ConnectCRE argues that inflation expectations have fallen sharply after last week’s CPI and PPI data, but financial markets still appear to price in a meaningful probability of an additional rate hike by the Federal Reserve.

The outlet says this creates a disconnect, suggesting the Fed will likely look through a near-term energy price spike and keep rates steady for an extended period rather than tightening further.

ConnectCRE also points to a structural shift in fixed income, arguing that long-dated real rates are elevated in a way that is not explained by the usual near-term business cycle, which it says is inconsistent with a classic rate-hike environment.

As inflation fears cool, ConnectCRE says the immediate threat of tightening is reduced, which could let short-duration yields recede and front-end rates compress, particularly as softer economic data comes through.

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