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ETF Trends: September rate hike odds rise as labor stays resilient
The piece argues that while inflation remains above target, the smaller gap versus the Fed’s 2% goal could limit how far long end Treasury yields move higher without a shock.
ETF Trends says last week’s upside payroll surprise highlighted labor market resilience even as concerns grow that AI-driven productivity gains could eventually weaken hiring. It notes that the strength in recent labor readings has increased the probability of a September rate hike.
The outlet adds that inflation has continued to make progress, but remains above the Fed’s 2% target, giving policymakers room to stay restrictive. It contrasts today’s outlook with the prior hiking cycle in March 2022, when inflation was far more elevated versus the target and the fed funds rate was near zero.
ETF Trends also points to the current policy settings, saying headline and core PCE inflation are running at 3.7% and 3.3%, while the policy rate is 3.5% to 3.75%. It argues that the narrower inflation gap may mean only modest additional tightening is needed, with bond yields potentially drifting higher but limited scope for a sharp move higher in longer-term Treasury yields absent an external shock.
Finally, the piece says a September hike could support the long end of the curve, particularly when combined with Fed buybacks, and that signaling continued commitment to returning inflation to target may help anchor long-term inflation expectations. It also says this could reduce the inflation risk premium in longer-duration bonds and place downward pressure on longer-term yields.