Recently, the market's expectations for the Fed to cut interest rates next year have soared, and the Fed has repeatedly "poured cold water" on this expectation. Overnight, Fed Chair Jerome Powell's hawkish speech continued this rhetoric, trying to weigh on rate cut expectations again.
However, the market doesn't seem to be buying it – the two-year Treasury yield plunged more than 10 basis points to a five-month low after Powell's speechThe yield on the 10-year Treasury note plunged to 421%, a new low in the past three months.
In fact,After the bond market reached a peak sell-off on October 19, Wall Street's view of interest rates changed dramatically. In the past five weeks, Wall Street has been "working against the Fed", completely ignoring the warnings of Powell and other Fed executives, and has taken up US Treasuries, causing yields to fall sharply.
Quincy Krosby, chief global at wealth management firm LPL Financial, said in a report:
"After Powell's brief but decisive warning at the 2022 Jackson Hole conference, markets stopped taking the Fed's changing comments so seriously. ”
For Wall Street, the recent fall was a "long season."
At that time, the market gradually agreed on the economy: the investment and trading circles finally began to trust the Fed's rhetoric over the past year or so that the Fed would not cut interest rates anytime soon in order to bring down inflation, and planned to keep them at nearly two decades highs for a long time.
During this period, the bond market experienced a sharp sell-off. This has directly pushed up borrowing costs in the US**, while also affecting consumer debt, such as credit cards and mortgages, that follow the movement of bonds**. At that time, the bond market was "doing its best" for the Fed by selling off – and thus raising borrowing costs – that is, by cooling spending and investment to reduce overall economic activity, which could lead to lower inflation.
However, after the peak of the sell-off in the bond market on October 19, Wall Street's views on interest rates changed dramatically. On Friday, the yield on the 10-year Treasury fell to 421% compared to 4 on October 19The 99% high fell sharply – and now, investors now believe that the Fed is unlikely to raise interest rates again.
At the same time, the bond market is currently set to cut interest rates as early as March next year – and just over a month ago, the market's first rate cut was in early 2025. Investors, including Bill Ackerman, are betting that the era of high interest rates is coming to an end.
At the moment, the bond market seems to be playing a game with Powell, as if "dreaming" back to the beginning of 2021 – at that time, it seemed that no matter what Powell said, the market thought he was wrong. When he called inflation "transitory" in 2021, bond traders instead pushed yields to their pre-pandemic highs.
Now, investors are once again skeptical of Powell's remarks. Inflation appears to be cooling and has not triggered a recession, and the need to maintain such high interest rates is becoming increasingly questionable. Bond traders believe that Powell has no choice but to claim that another rate hike is possible. Otherwise, it could trigger another round of consumption frenzy that will further push down interest rates and thus inflation again – so they don't really buy it, even though they heard Powell.
But the problem is that the bond market is going crazy anyway**, and they are gradually erasing all the efforts they made for the Fed in September and October, which in turn lowers borrowing costs – and contrary to what the Fed expected, inflation remains unresolved.
So it's worth pondering who exactly do we trust: Powell or the bond market?
Investors expect the Fed to cut interest rates sooner than expected, but the more Wall Street believes this, the more likely it is to ease economic pressures and the harder it will be to achieve the 2% inflation target. In deciding whether to cut rates, the Fed will consider a large amount of data – including the abrupt (albeit limited) breathing space that the market is giving homebuyers.
It would be ironic if, on Wall Street, interest rate cut expectations forced the Fed to keep interest rates at higher levels for longer.
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