Market Shift: Interest Rates and Inflation Take Center Stage
Fed’s Latest Move: A Quarter Point Cut, But Fewer Cuts Ahead
The Federal Reserve has announced its third consecutive interest rate cut, decreasing rates by a quarter percentage point. While this move was widely anticipated, the central bank’s forecast suggests fewer rate reductions in the year ahead, predicting only two cuts instead of the previously expected four.
Treasury Yields Surge
As a result, U.S. Treasury yields have jumped, with the 10-year Treasury yield climbing nearly 12 basis points to 4.504%. The 2-year Treasury yield also surged more than 10 basis points to 4.348%. This increase in yields has a direct impact on prices, as the two have an inverted relationship.
Inflation Forecast Revised Upward
The Fed has also revised its inflation forecast slightly upward, indicating a more cautious approach to future rate adjustments. According to Fed Chairman Jerome Powell, “With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive.”
Market Reaction: A New Phase of Monetary Policy
The likelihood of another rate cut at the Fed’s next policy meeting in January has slipped to under 10%, according to fed funds futures trading. This shift has led some experts to declare that the Fed has entered a new phase of monetary policy, dubbed the “pause phase.” As Jack McIntyre, portfolio manager at Brandywine Global, notes, “The longer it persists, the more likely the markets will have to equally price a rate hike versus a rate cut. Policy uncertainty will make for more volatile financial markets in 2025.”
Global Central Banks Take Action
The Fed’s decision comes on the heels of the European Central Bank’s 25-basis-point rate cut last week, marking its fourth reduction this year. The Bank of England is set to announce its own rate decision on Thursday, adding to the global landscape of monetary policy shifts.
What’s Next for Markets and Investors?
As the Fed’s latest move takes effect, investors and markets alike will be watching closely to see how this new phase of monetary policy plays out. With inflation forecasts revised upward and rate cuts potentially fewer and farther between, the road ahead may be marked by increased volatility and uncertainty.
Leave a Reply