After a hotter than anticipated January CPI print, recent data has again pointed to inflation slowing. However, uncertainty remains as to what extent tariffs will result in more inflation. Job creation improved marginally in February, yet the underemployment rate also notably increased, which together may reflect a bias toward part-time job creation. The Federal Reserve appears poised to leave monetary policy unchanged in the near-term pending clarity on fiscal policy. As such, the Chandler team expects gradual normalization of monetary policy and a steepening yield curve through the remaining year.
After leaving the Fed Funds Rate unchanged at 4.25-4.50% at the January meeting, the Federal Open Market Committee (FOMC) did not have a scheduled meeting in February. Fed policy makers now find themselves in a precarious position as the polarizing initiatives the Trump administration posits continue to garner uncertainly and renewed fears of inflation. According to Chair Powell, the Fed is “well positioned to wait for greater clarity,” and likely to leave the Fed Funds Rate unchanged at the upcoming March FOMC meeting. The market implied probability for a March rate cut is at 0.8%. As the effects of trade and fiscal policy become clearer, our view at Chandler is for monetary policy easing to continue at a slower cadence through 2025.
US Treasury yields declined, and the curve flattened in February. The 2-year Treasury yield declined 21 basis points to 3.99%, the 5-year Treasury fell 31 basis points to 4.02%, and the 10-year Treasury yield dropped 33 basis points to 4.21%. The spread between the 2-year and 10-year Treasury yield points on the curve narrowed to +22 basis points at February month-end versus +34 basis points at January month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was -37 basis points. The spread between the 3-month and 10-year Treasury yield points on the curve was -9 basis points in February, versus +25 basis points in January.