Wednesday will see the Fed deliver an interest rate cut, most likely 25bp. It’s fully priced. So, material market impact would have to come from either a surprise 50bp cut, or commentary from Chair Powell that swings dramatically in either a decidedly hawkish or dovish direction. A 25bp cut gives room for a somewhat dovish leaning, while a 50bp cut would allow Chair Powell to be as hawkish as he likes, as the move itself would dominate aggregate impact.
Until or unless we get to an inflation hiccup of significance, the prognosis for the front end is pretty straightforward, as it will remain slavish to the trend lower in the funds rate. That said, the front end is priced for a series of cuts already, and now requires validation to keep them as is. The reaction of longer dates is open to more uncertainty. We’ve laid out our opinion on this here – basically we see some downside to 10yr rates as we progress through the novelty period (the first cut), but beyond that we expect to see the 10yr rate rise.
It’s always dangerous to rely on what happened the last time the Fed cut rates (September-December 2024), but that is what happened last time, as Fed cuts coincided with sticky inflation and a firming of the economy. The danger this time around is the economy has the optics of being weaker. Rate cuts should have the effect of blunting the macro weakness risk. But it still leaves us with a rising inflation risk in the coming months, which could pull long rates up with it.
Source link
