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By G. Steven Bray
The good thing I can say about interest rates is they’ve stayed in a pretty narrow range for the last couple weeks. Unfortunately, that range is about 3/4 of a point higher than it was a few months ago, and market forces seem aligned to keep it from falling.
We took a run at lower rates last week with the President’s announcement of tariffs. However, the lower rates lasted less than 24 hours and really didn’t break below their recent range. At this point, markets seem to have completely discounted the possible negative effects of the tariffs and have returned to the upper end of the range.
So, what are the forces? One that pundits continue to cite is expectations for higher inflation. On that, it’s instructive to look at the most recent data. Last week, we got the Federal Reserve’s favored inflation index, the PCE Deflator. It was flat and matched expectations with the headline number showing 1.7% inflation. The core index, which strips out food and energy costs, was 1.5%. The Fed’s target is 2%, so one could argue that inflation remains stubbornly subdued. Markets barely noticed.
This week, we get the Feb jobs report and with it a look at wage inflation. The Jan report showed wages increasing at the fastest pace in years, albeit matching economists’ expectations. I’d wager markets are going to be far more interested in this report than they were the PCE report.