Hopes that the Federal Reserve will begin cutting interest rates in March are getting slimmer, and bond traders have finally learned the oldest lesson:Don't go against the Fed! Current swap market rates show that bond traders** the Fed has cut interest rates 4-5 times this year, with each rate cut by 25 basis points, which is close to the Fed's 3 rate cuts**.
On Feb. 12, ** reported that the sudden banking crisis in March last year left bond traders wrongly betting that the Federal Reserve would be forced to stop raising interest rates, causing them to suffer significant losses from 2022 Treasuries***.
In December, when Fed Chairman Jew Powell made a sudden U-turn, traders began betting that the Fed would cut interest rates aggressivelyAs early as March, interest rate cuts have peaked at 175 basis points, which is a huge difference from the Fed's three rate cuts of 25 basis points each
However, after a flurry of economic data, the Fed** stressed one after another that it was not ready to start cutting interest rates until it was sure that inflation was moving towards the 2% target, and bond market traders had to start re-examining their rate cut expectations.
* Bond market traders are gradually aligning themselves with the Fed in order to reduce market surprises and potential losses that could be caused again, the analysis said.
Ari Bergmann, founder of Penso Advisors, said the message from the Fed's statement was that they wanted to do some insurance rate cuts, and they saw that inflation was coming down, "and I think the market is pricing in it right now." ”
More than six months have passed since July 26, 2023, when the Fed carried out the "last plus" of this tightening cycle.
During this period, inflation has fallen steadily, the Fed's favorite core PCE price growth rate hit a new low in nearly three years in December, and Wall Street expects the January CPI to be released tomorrow will be **3 year-on-year7%, the smallest year-on-year increase since April 2021. The year-on-year and month-on-month growth rates of the US CPI in December exceeded expectations**, the month-on-month growth rate of the core CPI was flat, and the "re-rising" inflation weighed on the expectation of a rate cut in March, and the two 2024 Fed members both said that they needed to see more evidence of inflation coming down, and they remained cautious about interest rate cuts before that.
However, with core inflation not heating up, market expectations of interest rate cuts remain strong. Nick Timiraroos, known as the "New Fed News Agency", wrote:
"The CPI report is unlikely to change the Fed's near-term policy outlook. Inflation data in the coming months is likely to have a greater impact on the timing of the Fed's first rate cut. ”At the same time, the number of non-farm payrolls in the United States surged in January, and GDP in the fourth quarter of last year far exceeded expectations, and Goldman Sachs raised its 2024 GDP growth** by 03 percentage points to 24%。A series of data suggests that the US economy remains resilient, and the prospect of a "soft landing" is becoming clearer.
With unexpectedly strong economic data, the market is pricing in a 90% chance of the Fed cutting interest rates for the first time in May, with the probability of a rate cut falling back to 17 in March5%。
Last week, three Feds took turns shouting to lower expectations for the market, saying that they had not found any reason for an emergency interest rate cut, suggesting that interest rate cuts would have to wait until May at the earliest.
Fed Governor Adriana Kugler said investors have lowered their bets on a March rate cut and set their sights on May 1, but they have not completely given up on expectations of a March rate cut. Kugler, who spoke publicly for the first time since joining the Fed in September, said she was optimistic about progress in the fight against inflation, but did not disclose a timetable for possible rate cuts. "At some point, the continued slowdown in inflation and the labor market could be an opportune time for rate cuts," Kugler said.
Collins, who has no voting rights this year, said she was looking for evidence that inflation was moving towards the 2% target before cutting interest rates, a step that could not be taken until later this year.
Kashkari, who also has no voting rights this year, said in an interview that they want to watch inflation data for a few more months before cutting interest rates. He**, there may be two or three rate cuts in 2024.
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