Traders Bet on More Easing as Fed Opts for Half-Point Rate Cut
(Bloomberg) -- Traders ramped up their bets on the pace of future US interest-rate cuts after the Federal Reserve reduced its benchmark by half a point and signaled more cuts coming this year.
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The market is now pricing in another 70 basis points worth of rate reductions at the Fed’s two remaining meetings this year, reflecting a far more aggressive stance than policymakers. Officials on Wednesday forecast just a half-point of further easing in 2024, though Chair Jerome Powell made clear that Wednesday’s decision wasn’t indicative of the pace ahead for cuts.
Treasuries, which are set for a fifth-straight month of gains in September, slipped after the Fed’s decision and Powell’s remarks. Still, Jamie Patton, co-head of global rates at the TCW Group Inc., said traders are correct to price in more rate cuts than Fed officials implied in their so-called 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.”
Ahead of the announcement, a majority of forecasters had predicted the Fed would kick off its rate-cutting cycle with a quarter-point cut on Wednesday. However, some economists — including those at JPMorgan Chase & Co. and Bloomberg Economics — had expected a half-point move, while traders were split.
The move caps months of uncertainty over the timing and scale of the Fed’s first rate cut. Now, the focus shifts to the pace of reductions ahead.
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 market-implied pricing of rate cuts, by contrast, puts the rate at below 3% by July.
“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.”
What Bloomberg strategists are saying...
“Bonds drew profit takers once the dust settled on the Federal Reserve decision. Fed Chair Jerome Powell’s downplaying of the risk of a downturn and noting the job market remains strong bode well for bear steepening in the yield curve.”
— Alyce Andres, US rates/FX strategist on MLIV
In the Treasury market, yields ended the day higher. Two-year yields were up one basis point after earlier declining as much as seven basis points to about 3.54%. Volumes in October fed funds futures soared, with action consistent with traders locking in profits tied to bets on a half-point cut.
“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.”
--With assistance from Michael Mackenzie, Anya Andrianova, Edward Bolingbroke and Carter Johnson.
(Updates rates throughout, added fund manager comment.)
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