Fed Rate Cut Fails to Ignite Bond Rally
The Federal Reserve’s widely anticipated interest rate cut has left bond traders underwhelmed, with little insight into the central bank’s future plans. Despite the cut, Treasury yields have inched higher, adding to Thursday’s gains.
Uncertainty Reigns
The 10-year yield has dropped eight basis points this week, the largest decline since September. However, this dip is unlikely to mark the beginning of a new trend, as President-elect Donald Trump’s policies are expected to boost inflation and drive up the deficit. Fed Chair Jerome Powell expressed concerns about the unsustainable path of the federal government’s fiscal policy, but refused to comment on Trump’s plans.
No Clear Direction
Powell’s statement did little to provide clarity on the Fed’s next move, leaving swaps traders to price in a 70% chance of another rate cut in December. According to Lawrence Gillum, chief fixed-income strategist at LPL Financial, “The statement didn’t really move against the recent bond market re-pricing… He did leave the door open enough to suggest that if the data is stronger than expected, they could skip December.”
Market Expectations Shift
Traders have adjusted their expectations for the Fed’s benchmark rate next year, with swaps traders now seeing the target band falling to around 3.7% in a year’s time, up from 3% just a month ago. The Fed’s statement omitted a key phrase about achieving “greater confidence” in inflation reaching 2%, which some analysts interpret as a sign that a December pause is possible.
Risks and Uncertainties
Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management, notes that “stronger data and uncertainty over fiscal and trade policies mean rising risks that the Fed may opt to slow the pace of easing.” Despite the Fed’s rate cuts, 10-year Treasury yields have risen, driven by strong economic data and Trump’s election.
Powell’s Perspective
When questioned about the impact of rising bond yields on the Fed’s policy, Powell brushed aside concerns, stating that “we’ve watched the run-up in bond rates and it’s nowhere near where it was, of course, a year ago… So we’re watching that. Things have been moving around and we’ll see where they settle.”
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