After the Federal Reserve significantly cut interest rates, market expectations for easing still outpaced, leading to a decline in US bond yields
After the Fed's rate cut, the market still has a strong expectation for future easing policies, leading to a decline in US Treasury yields. Traders are focusing on the labor market conditions, with short-term US bonds performing well. Despite Powell describing the rate cut as a policy "adjustment," the market still expects three more rate cuts before the end of the year. Analysts point out that future economic data will determine the market's expectations and the Fed's policy confrontation
According to the Wisdom Financial APP, as traders shift their focus from the highly anticipated first rate cut by the Federal Reserve to the labor market conditions, U.S. Treasury bonds have seen a slight increase. Yields on various maturities of U.S. bonds have declined, with short-term U.S. bonds performing well. In particular, the two-year U.S. bond yield fell by 3 basis points to 3.59%.
Despite Federal Reserve Chairman Powell describing Wednesday's 50 basis point rate cut decision as a "policy adjustment," market expectations for the speed and extent of further easing this year and beyond have hardly changed. The money market tends to believe that the Fed will cut rates by 25 basis points three more times before the end of the year, and is expected to cut rates by 200 basis points next year. Such expectations are more aggressive than the interest rate path shown in the Fed's latest dot plot, which only indicates another 50 basis point cut this year.
Jack McIntyre, portfolio manager at Brandywine Global, said, "It will now be a showdown between market expectations and the Fed, with employment data - not inflation data - determining which side is correct." "As this policy is mainly about signaling, there has not been much volatility in the financial markets. Now, everyone is back to relying on data."
Powell stated that the Fed's rate cut of more than the 25 basis points that many market participants expected will help limit the possibility of an economic downturn while the U.S. economy remains strong. He added that he believes policymakers are not acting too late. However, the Fed's updated economic forecast summary raised the median expected unemployment rate at the end of 2024 from 4% in June to 4.4%, and Powell had previously stated last month that further cooling of the labor market would be "unwelcome."
Jean Boivin, head of investment research at BlackRock, said, "The Fed's move on Wednesday was unexpected and may be beneficial to the market in the short term. However, we believe this increases the likelihood of further volatility in the future, especially if economic growth and inflation trends do not align with the Fed's latest forecast of a soft landing scenario."