Hopes for Lower Interest Rates Fade as Inflation Doesn’t. It’s Bad News for Bonds and Stocks.

Blame it on Punxsutawney Phil. Since the furry varmint poked his head out of his den on Feb. 2, there has been a wholesale reassessment of the outlook for the economy and interest rates. Maybe it wasn’t his shadow that the famous groundhog saw, but a slew of indicators that showed unseasonably hot economic readings with no cooling in inflation.

Since he emerged, interest rates have risen by more than a half-percentage point, whether for futures-market pricing of the eventual peak of the Federal Reserve’s target for its key policy rate—on overnight federal funds—or Treasury maturities, from the two-year note to the 10-year benchmark. This has reversed the previous optimism that fed funds would peak sooner and at lower levels than the Fed had projected in December. That bullishness had gained further favor after Jerome Powell, the central bank’s chief, spoke encouragingly of “disinflation” at its latest policy meeting, concluded on Feb. 1.