Fed Removes Guidance Shackles Sees Treasuries Dip
U.S. Treasuries post-FOMC volatility produced losses in 10s and shorter tenors while the long bond outperformed.
Earlier May Retail Sales report (0.9%; consensus 0.5%) came in comfortably ahead of expectations. The complex navigated a sideways range into the afternoon, falling in immediate reaction to the first FOMC Statement with Chairman Warsh at the helm. The policy Statement was much shorter than past releases, simply announcing the decision to keep the fed funds rate range steady, with an added observation that economic activity is expanding at a solid pace despite elevated uncertainty.
The Statement acknowledged that inflation has remained elevated, which prompted an increase to the central bank’s PCE forecast for 2026 to 3.6% from 2.7% while the outlook for 2027 was increased to 2.3% from 2.2%.
The central bank also nudged its 2026 unemployment rate forecast down to 4.3% from 4.4% while the growth outlook for this year was lowered to 2.2% from 2.3%. The median forecast for the fed funds rate at the end of the year increased to 3.8% from 3.4%.
During his press conference, Fed Chairman Warsh reiterated the core message of the policy statement, adding that forward guidance is not well suited to “current policy juncture.” He made it clear that he does not want financial markets to continue evaluating data by trying to guess the Fed’s response to the data.
He also signaled future reforms to the Fed’s conduct of monetary policy by announcing task forces that will focus on five areas:
(1) Fed’s communications,
(2) balance sheet,
(3) use and reliance on existing data sources,
(4) productivity and jobs in an era of transformation, and
(5) Fed’s inflation frameworks.
Treasuries diverged after the initial post-FOMC selling, with the 2-yr note remaining at its low while longer tenors outperformed, resulting in a modest gain in the long bond.
Crude oil spent the bulk of the session near $76bbl
U.S. Dollar Index rose 0.4% to 99.94.
Yields Close:
2-yr: +11 bps to 4.16%
3-yr: +9 bps to 4.18%
5-yr: +8 bps to 4.23%
10-yr: +4 bps to 4.46%
30-yr: UNCH at 4.93%