Market participants’ expectations for future inflation, as measured by break-even rates, could rise by enough for the Federal Open Market Committee to consider keeping interest rates on hold next month, according to Thierry Wizman, global foreign-exchange and rates strategist at Macquarie.
The 10-year break-even rate has risen to 2.27% as of Wednesday, based on the most recent data available from the Federal Reserve Bank of St. Louis. That was before Thursday’s data on retail sales and jobless claims, both of which pointed to a U.S. economy that remains strong.
Referring to the possible outcome of next month’s presidential election between Vice President Kamala Harris and former President Donald Trump, Wizman said, “we think that should breakevens get to 2.50% — presumably, they can go higher if Trump wins — then the FOMC would contemplate ‘calling off’ the November rate cut. What happens on Nov. 5 is critical to what happens on Nov. 7,” the latter date being when the Federal Reserve releases its next policy update.
Five- or 10-year break-even rates above 2.5% have previously been identified by others as the level at which market participants would begin to signal growing concern about more sustained upside risk to inflation.