Powell’s own guidance on recession suggests rate cuts are coming
(Bloomberg) — A recession is certain and so will a rate cut this year. That’s the message from the bond market gauge that Federal Reserve Chairman Jerome Powell highlighted a year ago as the best guide to dealing with economic troubles in the United States.
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The 3-month T-bill rate is expected to fall to 134 basis points below current rates. That was below the previous record low it hit in January 2001 – about two months before the US economy slipped into recession.
“Honestly, there’s a good study of employees in the Federal Reserve system that actually say look at the short term — the first 18 months — of the yield curve. That’s really what is 100% explanatory of the yield curve. It makes sense. Because if it reverses, that means the Fed is going to cut, which means the economy is weakening.” — Fed Chair Powell on March 21, 2022
Treasuries extended their gains on Thursday after the Fed raised its key rate by a quarter point as traders ramped up bets that the central bank would soon reverse course and start cutting rates. capacity. They are certain that the Fed will lower rates in September to at least reverse the rate hike this week.
The market view contrasts with the Fed’s guidance that it expects at least one rate hike from here on, and with Powell’s comment that he doesn’t expect any cuts to spending. loan fees this year.
“Given the tightening of policy so far and the bank credit crunch, it is likely that the Fed will have to cut rates faster than the current market anticipates,” TD Securities strategists include both Jan Groen wrote in a note Wednesday. “As we continue to expect the economy to slip into recession in the fourth quarter, we maintain our call that rate cuts will begin at the December meeting.”
Yields on two-year US bonds fell 7 basis points to 3.87% on Thursday after falling 23 basis points on Wednesday. The decline in the two-year yield far outweighed the decline in the 10-year yield, recreating the deep inversion of the curve that many observers focus on as a recession indicator. That part of the curve usually climbs above zero just before the economy begins to decline.
Swap traders see about a 50 percent chance that the Fed will not raise rates again, following a 4.75 percentage point rate increase starting with its decision to raise it by a quarter point on March 16, 2022.
Traders Bet on Fed Cuts of 2023 Not Powell’s ‘Base Case’
(Updates with Treasury yield changes in paragraphs 3 and 6.)
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