Data released Thursday by the Bureau of Labour Statistics in the US showed initial claims for unemployment benefits fell to 217,000 in the week ended July 19, the lowest since mid-April. With employment rate remaining at stronger-than-expected 4.1 per cent, it is clear that the Fed may hold off on rate reductions due to a robust economy.
US President Donald Trump also toured the central bank’s headquarters on Thursday, where a $2.5 billion renovation is ongoing. Trump’s administration has accused the central bank of cost overruns in renovations – another reason for a rift between Trump and Fed Reserve Chair Jerome Powell.
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Trump has been publically critical of Powell for not slashing interest rates in the country, which Powell says he will hold back on to watch how Trump’s tariffs affect the economy.
“We would be helped if interest rates would come down,” Trump told reporters, standing next to Powell. “But we’re going to see how the board rules on that soon. I’d love to see them come down a lot.”
Traders have ruled out a rate cut at the Fed’s meeting next week, now that US treasuries have also slipped.
“The mounting risk of the Fed being seen as acting more on a political than a fundamental level is a sizable threat to long-end rates over the medium term,” Rabobank strategists wrote in a note.
Meanwhile, the treasury yields increased by about three basis points across most maturities, with shorter-term debt, which is more sensitive to monetary policy changes, experiencing the most significant rise.
Traders now anticipate 42 basis points of reductions by the end of the year, with the first full cut expected by October, later than previously anticipated.
The current quiet period in rates may be temporary, say traders, who will keep a watch on upcoming data releases like GDP and payrolls that may lead to market repricing. “The bottom line is that the Fed can’t credibly cut rates with an unemployment rate of 4.1 per cent,” said George Catrambone, head of fixed income, DWS Americas. “There is a glass ceiling on how high yields can push out of their current range with a Fed that’s frozen in place.”
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