Yields slide as Bullard sees Fed cutting rates as soon as March

Former St. Louis Federal Reserve President James Bullard has projected that interest rate cuts could happen as soon as March, before inflation hits the central bank’s target of 2%, according to a WSJ interview.

“Inflation on a 12-month core basis (excluding food and energy prices), you could get to 2% by Q3 of this year,” he said on WSJ’s Take on the Week podcast.

Note that the personal consumption expenditures price index, the Fed’s favorite inflation gauge, fell to 2.6% in November from a year ago. The next report is scheduled for Friday.

This could prove to be a challenge for the Fed, Bullard warned. “They don’t want to get into the second half of 2024, and inflation’s already at 2% and you still haven’t moved the policy, right? That would be too late.”

Bullard’s statements pushed yields lower, with the U.S. 10-year Treasury yield falling 4 basis points to 4.10%, while the 2-year yield was down 6 bps at 4.32%. See how Treasury yields have done across the curve.

Market participants have been pulling back on bets that rate cuts would start in March, as the Fed’s minutes for its Dec. policy meeting showed that there were concerns of inflation ramping up again year.

If inflation is at 2%-2.5% and there are still no rate cuts, then the Fed may “have to move very aggressively, with 50 bps or something, and that would be difficult,” Bullard warned.

“With the jobs market remaining tight and inflation still above target, we continue to take the view that May is the more likely start point for Fed easing versus the market’s pricing of March,” said ING economists.