Investing.com — Hawkish-leaning Federal Reserve members have recently flagged fresh worries about the risk of a pick-up in inflation — and Macquarie believes these jitters may be justified as recent data is showing that inflation expectations are on the up and up since the U.S. election. 

“The Fed’s hawks, in effect, are right to worry a bit more about the resumption of some US inflation, following the US election,” the analysts said.

A second Donald Trump administration rolling out policies such as tariffs that are likely to be inflationary is also filtering into inflation expectations despite uncertainty about those policies. 

“The prospect that the coming policy agenda change can foster US inflation sooner than when the policies are actually implemented,” the analysts said, flagging a pick-up in inflation expectations.

“Five-year inflation break-evens… continue to climb toward that critical level of 2.5%, which marks the demarcation between consistency with the Fed’s 2.0% inflation target (on the PCE PI) and inconsistency with reaching that target,” they added.

Hawkish Fed members including Fed governor Michelle Bowman have suggested the central bank may need to slow the pace of rate cuts amid greater concerns about inflation and expectations that the end point for rate cuts may be closer than previously thought.

“I would prefer to proceed cautiously in bringing the policy rate down to better assess how far we are from the end point, while recognizing that we have not yet achieved our inflation goal and closely watching the evolution of the labor market,” Bowman said on Tuesday. 

The slew of less dovish Fed speak has shifted market expectations for Fed rate cuts recently.

The USD overnight index swap yield curve “now implies only a 35%-40% probability of a Fed rate cut in December, down from 60% at the beginning of November,” the analysts said.

This shift in expectations comes as the 2-year US Treasury yields have risen by 80 basis points relative to German Bund yields since the end of September, when Donald Trump’s electoral prospects began to recover.