(Bloomberg) — Traders ramped up their bets on the pace of future interest-rate cuts from the Federal Reserve after the US central bank reduced its benchmark by half a point.
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The market now shows about 70 basis points worth of combined cuts over the remaining two policy meetings this year. The Fed’s projections — known as the dot plot — show a narrow majority favor lowering rates by at least an additional half-point in 2024.
That indicates traders are once again ahead of the Fed in pushing for lower borrowing costs, even after policymakers kicked off their easing cycle with a larger-than-forecast move.
They held on to their boosted bets on easing even after Chair Jerome Powell made clear that Wednesday’s decision wasn’t indicative of the pace ahead for cuts. Those comments were enough to push Treasury yields higher across the curve, leaving the monetary policy-sensitive two-year yield little changed after an earlier slide.
To Jamie Patton, co-head of global rates at the TCW Group Inc., traders are correct to price in more rate cuts than Fed officials implied in their dot plot.
“The market has historically done an OK job of predicting the amount and pace of early cuts,” she said. “But, in the most-recent three cycles, rates have grossly underestimated the total amount of cuts. We think this time is no different, and we’ll see that same theme again this cycle.”
The majority of forecasters had predicted the Fed would reduce rates by a quarter point on Wednesday. However, some economists — including those at JPMorgan Chase & Co. and Bloomberg Economics — had expected a half-point move. Traders had given about even odds for the Fed to push through the larger cut.
Officials’ updated quarterly forecasts showed the median projections were for the funds rate to fall by year’s end to 4.375% — representing a further half-point of total reductions this year. By the end of 2025 and 2026, the median forecasts are for 3.375% and 2.875%, respectively.
“The fact that the dot plot is not suggesting more 50-basis-point moves further feeds the narrative that this is a start — and proactive — rather than a trend,” said Nathan Thooft, a senior portfolio manager at Manulife Investment Management in Boston. “It probably also suggests they regret not starting with 25 basis points at the last meeting.”
The market-implied odds of rate cuts ahead show an even more aggressive path for the Fed, putting the rate at below 3% by July.
What Bloomberg strategists are saying…
“While the initial reaction is dovish, there has been so much priced by markets that it is hard to see a lot of upside for fixed income.”
— Cameron Crise, macro strategist. Read more on MLIV.
The yields on two-year notes were little changed after earlier dropping as much as seven basis points to about 3.54%. Longer-dated Treasury yields ticked higher. The moves follow a recent rally in US government debt leading up to Fed’s September decision, which has put a Bloomberg gauge of Treasuries on course for a fifth-straight month of gains.
“We’re telling clients just get into the bond market,” Bob Michele, JPMorgan Asset Management global head of fixed income, told Bloomberg Television. “Yields are coming down.”
A key gauge of the US dollar dropped as much as 0.5% to the lowest level since early January before paring the move.
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–With assistance from Michael Mackenzie, Anya Andrianova, Edward Bolingbroke and Carter Johnson.
(Updates rates throughout, added fund manager comment.)
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