Concerns about inflation stickiness are rising, and traders are closely monitoring inflation data to assess the prospects for a rate cut in September

After the Federal Reserve released a clear signal that it might delay interest rate cuts, the market's focus has quickly shifted to the inflation data to be announced tonight at 20:30, with traders looking for evidence of persistent price pressures.

At Wednesday's policy meeting, the Federal Reserve decided to keep interest rates unchanged. More importantly, Fed Chairman Jerome Powell's remarks suggested that investors may need to wait longer for the first interest rate cut of the year. This hawkish signal immediately reversed market sentiment, with the probability of a rate cut in September plummeting from 80% before the meeting to 40%.

If the upcoming PCE price index shows sticky inflation, the market's expectation for "maintaining high rates for a longer time" may further solidify. Economists expect the core PCE month-on-month rate to rise from 0.2% to 0.3%. Powell has previously made it clear that sticky inflation remains a risk.

As a result, U.S. Treasury bonds regained some ground on Thursday. The previous day's hawkish Fed decision led to a sell-off in Treasuries, pushing the yield on the two-year U.S. Treasury bond up 7 basis points on Wednesday. On Thursday, the yield fell 1 basis point to 3.93%, but it has risen more than 20 basis points in total throughout July. The yield on the ten-year U.S. Treasury bond also slightly decreased by 3 basis points to 4.34% on Thursday.

Hawkish Signals Reshape Market Expectations

The Federal Reserve's latest policy stance did not surprise everyone. Anshul Pradhan, head of U.S. interest rate strategy at Barclays, and his colleagues wrote in a report:

“We had previously expected the outcome of the Federal Open Market Committee meeting to be hawkish, and Chairman Powell did not disappoint us.”

The bank has long believed that the market should pay more attention to the possibility of a delayed interest rate cut, predicting that the first cut would not occur until December.

Despite repeated calls from President Trump for the Federal Reserve to lower borrowing costs, Powell has resisted the pressure. He clearly stated that, given the strong labor market and inflation rates still above target levels, the conditions for a rate cut are not currently in place. Market inflation expectations have also not cooled, with swap contracts measuring long-term U.S. inflation expectations showing that since April, inflation expectations have risen by about 20 basis points to 2.50%.

Tariff Impact Becomes a New Variable for Inflation

In addition to existing inflation pressures, the impact of increased tariffs in the U.S. adds a high degree of uncertainty to the outlook, especially as many trade agreements were just reached this week.

Economic data indicate that businesses have begun to more noticeably pass some tariff-related costs onto consumers. However, Powell stated on Wednesday that the Federal Reserve "is looking at the issue through the lens of commodity inflation to some extent, rather than choosing to raise interest rates." This suggests that policymakers may believe that the price increases caused by tariffs are temporary However, the complexity of the inflation path is prompting some investors to adopt a defensive posture in response to potential price surprises. Justin Onuekwusi, Chief Investment Officer of St. James’s Place, increased his holdings in U.S. Treasury Inflation-Protected Securities (TIPS) in his portfolio last week.

The move to increase TIPS reflects the rising demand among investors to hedge against inflation risks in the current environment. In an interview, Justin Onuekwusi explained his views on the impact of tariffs, stating that he believes tariffs are "inflationary in the short term, but deflationary in the long term," and added:

"In the current environment, it is very difficult to understand the form of inflation."