Is the Fed Likely to Cut Rates Only Once?

Bond markets showed increasing skepticism about the Fed delivering two more rate cuts this year.

Currently, traders see only about a 20% chance that the Fed will keep rates unchanged in November or December. Even after last Friday’s strong U.S. jobs report, the swaps market still suggests that by the end of the year, the Fed will cut rates by over 50 basis points, potentially through two consecutive cuts.

This week, U.S. Treasury bonds fell. Bloomberg's U.S. Bond Index is set for a fourth straight week of declines, marking the worst performance since April. The 10-year Treasury yield is back above 4%, while the 30-year yield hit 4.41%, the highest since July 30.

This shift reflects a string of mixed economic reports from the U.S., which have failed to give the Fed a strong reason to ease monetary policy significantly. Despite the Fed’s "dot plot" signaling two more rate cuts this year, Atlanta Fed President Raphael Bostic said he would consider pausing cuts, while San Francisco Fed President Mary Daly mentioned the possibility of one or two more cuts this year.

Kit Juckes of BNP Paribas noted in a report:

“While market uncertainty around the outcomes of upcoming Federal Open Market Committee (FOMC) meetings remains, the near-50 basis point rise in 10-year Treasury yields since mid-September suggests that markets are increasingly confident the U.S. economy won’t experience a "hard landing." This raises concerns that, unless fiscal tightening occurs, inflation risks could resurface.”

Last Thursday’s consumer inflation data came in higher than expected, adding to the wage pressure indicated by last week’s non-farm payroll report. However, Friday’s Producer Price Index (PPI) data was more moderate overall.

Activity in the derivatives market suggests investors are hedging against the possibility of fewer Fed rate cuts. Demand for options tied to the Secured Overnight Financing Rate (SOFR) has concentrated on contracts betting the Fed will cut rates only once more this year. Meanwhile, in the futures market, there has been a wave of clearing out positions that had bet on a bond rally.

More 50bps! Which "Rate-Cut" Assets Will You Invest In?

Minneapolis Fed President Neel Kashkari commented to the media that he agrees a 50-basis-point rate cut is appropriate, although he could also support a 25-basis-point cut. Kashkari believes that it may be necessary to cut rates by another two 25-basis points by the end of the year. With the 50bps rate cut confirmed, can TLT start a new uptrend? Additionally, the rate cut might benefit small and mid-cap growth stocks. Will you choose IWM or ARKK?

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Is the Fed Likely to Cut Rates Only Once?

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