�۶���Ƶ

Video: The AI Show: CIO's Sundeep Gantori on GPT-5 and AI chip sales to China��(3 min)

US wholesale prices in July jumped more than expected, rekindling concerns that rising inflation remains a risk in the Federal Reserve’s path toward further easing. Driven by strong gains in both goods and services, the headline producer price index (PPI) posted the largest monthly increase in three years, while core PPI, which is viewed as a more stable measure of inflation as it excludes volatile components like food and energy prices, also grew at the fastest pace in 3.5 years.

The rate-sensitive two-year Treasury yield rose 5 basis points on Thursday, the US dollar strengthened, and markets scaled back their expectations for a Fed interest-rate cut in September. This is a reversal of market movements earlier this week, when the rise in consumer inflation was considered relatively mild.

However, fed funds futures still indicate a more than 90% probability of a Fed cut next month, and growing price pressures are expected as US tariffs feed through into the economy. We continue to believe that the Fed will resume easing in about a month’s time, Treasury yields should trend lower for the remainder of the year, and investors should put excess cash to work as inflation erodes portfolio returns from cash holdings.

The Fed’s path toward further rate cuts remains intact as the economy slows. We expect overall inflation to continue on a gradual upward trend as businesses pass along their higher costs, but we also believe slowing shelter inflation and pushback from increasingly stretched consumers should help offset some of the tariff impact on price pressures. Retail sales data due today may offer additional insight into the health of US consumers. More importantly, the downside risks in the labor market are likely to outweigh inflation concerns, as economic activity slows further in the second half of the year. We expect the Fed to bring its policy rate 100 basis points lower in the months to come, reducing returns on cash.

Lowering yields has been a policy priority for the Trump administration to alleviate budgetary pressure and stimulate demand. The US administration is aware that the recent passage of the One Big Beautiful Bill Act may accelerate debt growth and push interest costs even higher due to a higher term premium. The government has therefore been looking for ways to lower Treasury yields. Sovereign debt issuance has been weighted toward the short end of the yield curve, and the passage of the GENIUS Act has created an environment for stablecoins to potentially become a greater source of liquidity in the Treasury market. Additionally, the Fed is considering loosening regulations on banks’ capital requirements and opening a pathway for them to hold more government debt. These measures should all help to exert downward pressure on yields.

The underperformance of cash compared to other asset classes is a structural phenomenon. Historically, stocks have beaten cash in 86% and 100% of all 10- and 20-year holding periods, respectively, and by more than 200 times overall in terms of returns since 1926. The probability of bonds outperforming cash also rises with longer holding periods—from 65% over 12 months to 82%, 85%, and 90% over five, 10, and 20 years, respectively. With bond yields still at relatively high levels, quality fixed income can deliver stable and decent portfolio income.

So, we think taking on manageable levels of risk with excess cash would improve return potential and combat the corrosive effects of inflation. High-quality fixed income offers investors the opportunity to lock in rates higher than prevailing returns on cash, with the additional benefit of potential capital gains if the Fed needs to cut more aggressively. We favor medium-duration (five to seven years) exposure, given that we still see risks of higher volatility in the long end of the curve.