Interest rate traders "capitulated" to the Fed: betting on no more than three rate cuts this year!
Finance Associated Press, February 28 (edited by Xiaoxiang) Interest rate traders completely "surrendered" to the Federal Reserve on Tuesday - no longer expect the Fed to cut interest rates by more than 75 basis points this year, which makes their views consistent with the projections made by Fed policymakers in the December interest rate dot plot.
Interest rate swap contracts, which estimate the Fed's policy outlook, were further priced to higher levels overnight – the December contract reached 4.58% in afternoon trading in New York, just 75 basis points below the effective federal funds rate (EFFR) of 5.33%, signaling only three 25 basis point rate cuts this year.
The Fed's target range for the federal funds rate has remained in the range of 5.25%-5.5% since July last year.
At the beginning of the year, market expectations for a rate cut in 2024 briefly exceeded 150 basis points. For some, the reason for this dovish expectation was that they believed that the Fed's 11 rate hikes in the past two years would lead to at least a mild recession in the US economy this year.
Since then, however, U.S. economic growth data has generally exceeded expectations, while the downward trend in inflation has shown signs of stalling. Market expectations for the number of rate cuts by the Fed during the year have been moving closer to the median of the dot plot for policymakers in December.
In fact, there are certain question marks over whether even the current expectation of a full-year rate cut of 75 basis points (three 25 basis point cuts) will actually be realized. Some investors even believe that additional rate hikes may be necessary for the Fed.
For a further cooling of current rate cut expectations, Tony Farren, managing director of interest rate sales and trading at Mischler Financial Group, said, "The bubble that over-anticipated rate cuts has burst. The market pricing is now fair. ”
Leah Traub, portfolio manager at Lord Abbett, pointed out, "My view is, in a nutshell, 'this shift is finally here' – the market was overly optimistic about the timing and number of Fed rate cuts this year." ”
Fed policymakers have recently repeatedly said that while they expect to cut rates this year, they first need to see more evidence that inflation is on a sustainable path back to its 2% target.
Federal Reserve Governor Michelle Bowman reiterated on Tuesday that she expects inflation to continue to fall further as interest rates remain at current levels, but that it is too early to start cutting rates. Bowman said he would keep a close eye on upcoming data releases to assess the appropriate policy path, pointing to several risks that could increase inflationary pressures, including spillovers from geopolitical conflicts, easing financial conditions, and continued tightness in the labor market.
In terms of Treasury yields, Treasury yields of all maturities continued to remain elevated in volatile trading on Tuesday, as investors awaited key inflation data due on Thursday for further clues on when the Federal Reserve might start cutting interest rates. By the end of the New York session, the 2-year Treasury yield was down 2.7 basis points at 4.704%, the 5-year Treasury yield was up 0.1 basis points at 4.319%, the 10-year Treasury yield was up 2 basis points at 4.306%, and the 30-year Treasury yield was up 2.8 basis points at 4.429%.
The PCE price index, the Fed's favorite inflation gauge, will be released on Thursday and will provide further insight into whether price pressures are rebounding after the January CPI showed that inflation was hotter than expected last month.
Greg Faranello, head of U.S. rates strategy at AmeriVet Securities in New York, said: "As long as inflation remains somewhat sticky and employment continues to hold steady and support consumers, there will be no view of more rate cuts." ”
Fed Chairman Jerome Powell's congressional testimony next Thursday (March 7) and the February non-farm payrolls data released next Friday (March 8) will be the next two macro fundamental hotspots after this week's PCE data, which are also likely to affect market expectations for the Fed's interest rate cuts this year.
George Catrambone, head of U.S. fixed income at DWS Investment Management, said, "The market's view of forward rates has seemed a little too high over the past year, so it won't come as a complete surprise to me that a hawkish takeover until the data cools further." ”
(Finance Associated Press Xiaoxiang)