To The Moon

With the September FOMC meeting drawing near, bond markets anticipate additional rate cuts in the near future. The market’s attention has shifted from inflation data to the Federal Reserve’s policy moves, especially regarding interest rate adjustments.

CPI Data Reveals Cooling Inflation

The latest Consumer Price Index (CPI) data shows a moderation in inflation pressures. The CPI rose by 0.2% in August, aligning with market expectations. Meanwhile, the closely watched annual inflation rate dropped from 2.9% in July to 2.5%. Excluding the volatile food and energy prices, the core CPI increased by 0.3% in August, surpassing the expected 0.2%.

Following the release of this data, the CME FedWatch tool indicated an 85% probability of a 25-basis-point rate cut at the upcoming FOMC meeting on September 17-18. However, the mild inflation numbers have almost eliminated market expectations for a more substantial 50-basis-point cut.

Recent Performance of Bond ETFs

The CPI data has impacted the recent momentum of fixed-income ETFs. Long-term bond ETFs, such as the iShares 20+ Year Treasury Bond ETF (TLT), which had surged nearly 14% over the previous two weeks, are now facing some pullback pressure. Nonetheless, as the market continues to digest the upcoming rate cut expectations, the future performance of bond ETFs remains a key focus.

Looking Ahead: Post-September FOMC Policy

While the rate cut expected at the September FOMC meeting is widely anticipated, the market’s attention is gradually shifting toward the Federal Reserve’s future policy path. Fed Chair Jerome Powell has repeatedly emphasized that monetary policy will depend on forthcoming economic data, particularly on inflation and employment trends. Investors will closely watch upcoming labor market data, weekly jobless claims reports, and the Personal Consumption Expenditures (PCE) Price Index set to be released on September 27 to gauge the likelihood of future rate hikes or cuts.

According to the CME FedWatch tool, the market expects at least 100 basis points of rate cuts by the end of the year. This forecast explains the recent increase in interest in fixed-income assets, as bond prices typically have an inverse relationship with interest rates. Long-term bond ETFs like TLT, which are more sensitive to interest rate changes due to their extended maturities, stand to benefit the most in a rate-cutting environment.

The Market’s “Soft Landing” Hopes

From a broader market perspective, if the Federal Reserve can successfully engineer a “soft landing”—where inflation continues to decline steadily toward the 2.0% target without the U.S. economy slipping into a recession—capital markets, particularly equities, would greatly benefit. The recent rise in the attractiveness of bond ETFs reflects investors’ optimism about this potential soft landing scenario.

Conclusion

As the September FOMC meeting approaches, market consensus around a Fed rate cut is well established. However, the true driver of bond ETFs’ future performance will be the Federal Reserve’s policy direction after September. If further rate cuts materialize, long-term bond ETFs could continue to gain in the coming months. At the same time, investors should keep an eye on upcoming economic data to determine whether the Fed can manage to sustain economic growth while further lowering inflation, achieving the much-anticipated “soft landing.”