Traders Trim Fed-Cut Bets as Wholesale Inflation Clouds Outlook

The US Treasury building in Washington, DC.

(Bloomberg) -- Wall Street traders dialed back expectations for an interest-rate cut next month, sending Treasury yields higher, after fresh data on wholesale prices signaled tariffs are pushing up inflation.

Yields on short-term Treasuries, which tend to track expectations for monetary policy, rose sharply Thursday, with the two-year note climbing six basis points to 3.73%. The benchmark 10-year yield jumped and the dollar gained against a basket of peers.

Most Read from Bloomberg

The US-Canadian Road Safety Gap Is Getting Wider Festivals and Parades Are Canceled Amid US Immigration Anxiety To Head Off Severe Storm Surges, Nova Scotia Invests in ‘Living Shorelines’ Five Years After Black Lives Matter, Brussels’ Colonial Statues Remain For Homeless Cyclists, Bikes Bring an Escape From the Streets

The higher-than-expected increase in the producer price index — which suggests companies are passing along elevated import costs tied to tariffs — halted a Treasuries rally and surprised investors.

Traders had piled into bets on a September rate cut, with some wagering on a 50-basis-point move, after a largely benign report on consumer prices this week and comments from Treasury Secretary Scott Bessent in which he said policymakers could bring down borrowing costs as much as 1.5 percentage points.

“Today’s PPI makes you take a step back and just re-assess,” said Priya Misra, a portfolio manager at JPMorgan Asset Management. “We’re in the midst of a stagflationary shock.”

Interest-rate swaps still show at least half a percentage point of rate reductions by the end of the year, but the odds of a September cut fell to around 85% from more than 100% before the day’s developments.

Producer prices increased 0.9% in July, Thursday’s report from the Bureau of Labor Statistics showed, more than four times as much as the median economist forecast. Within the report, services costs increased 1.1%. It followed a largely benign reading on consumer prices released Tuesday.

Fed officials, who last month left rates unchanged in a range of 4.25% to 4.5%, have signaled they are weighing mixed signals from the economy ahead of their Sept. 16-17 policy meeting. St. Louis Fed President Alberto Musalem said Thursday it was too early to decide whether he will support a cut.

Investors are now watching for clues from the Fed’s annual gathering in Jackson Hole, Wyoming, where Chair Jerome Powell is set to speak later this month.

President Donald Trump has repeatedly criticized Powell for failing to bring down borrowing costs. Bessent on Thursday said that while he wasn’t calling for the Fed to lower rates, economic models suggest there’s room for rates to come down 150 basis points to a “neutral” level at which policy is neither restraining nor stimulating the economy.

Story Continues

WATCH: US wholesale inflation rose in July by the most in three years, as the producer price index increased 0.9% from a month earlier after no change in June. Jonathan Ferro and Lisa Abramowicz report.Source: Bloomberg

What Bloomberg strategists say...

“While yields are rising across the curve after a pickup in July PPI figures, the move appears to be led by mild profit taking after they declined earlier this week.”

— Alyce Andres, Macro Strategist, Markets Live

For the full analysis, click here.

For investors, Tuesday’s consumer price reading was enough to solidify wagers on a quarter-point reduction in September, with some jumping into bets on an even bigger move of 50 basis points.

Despite the reading on producer prices, they added to a position in the Secured Overnight Financing Rate (SOFR) on Thursday that would benefit from a move of more than 25 basis points.

“PPI is not going to change the overall narrative, but it does take off some of the 50-basis-point risk the marketplace had been thinking about,” said David Robin, an interest-rate strategist at TJM Institutional Services LLC.

--With assistance from Michael Mackenzie and Edward Bolingbroke.

(Recasts with additional context and updated prices.)

Most Read from Bloomberg Businessweek

Americans Are Getting Priced Out of Homeownership at Record Rates What Declining Cardboard Box Sales Tell Us About the US Economy Bessent on Tariffs, Deficits and Embracing Trump’s Economic Plan Dubai’s Housing Boom Is Stoking Fears of Another Crash Twitter’s Ex-CEO Is Moving Past His Elon Musk Drama and Starting an AI Company

©2025 Bloomberg L.P.

View Comments