MacroResearchBoard

U.S Policy Rate Expectations: Here We Go Again – May 19, 2025

A just-published report provided an update on our global investment stance, noting that risk-on could persist for a while longer barring a flip back by President Trump to aggressive tariff threats and actions.

One unique pattern throughout the post-pandemic economic expansion has been the persistent front-running of Fed rate cuts, despite the largest rise in inflation since the 1970s. Investors again discounted a significant easing in Fed policy earlier this year due to fears of a tariff-induced recession. Instead, the Fed left policy unchanged and U.S. rate expectations have rebounded in the past few weeks once Trump pivoted on his tariff policy.

Sticky and above-target inflation plus improved economic prospects imply that no rate cuts will be forthcoming, which will put upward pressure on Treasury yields. Add in a deteriorating fiscal outlook, from a starting point of massive budget deficits and ever-rising debt relative to GDP, and there are rising odds of a resumption in the Treasury bear market.

While the equity market is currently “celebrating” improved economic prospects, it will soon have to deal with another round of higher bond yields and downward pressure on P/E ratios, stay tuned.