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Fed’s Powell fails to correct market’s rationale behind six rate cuts in 2024

1 Minute ReadFed’s Powell fails to correct market’s rationale behind six rate cuts in 2024

YAHOO – In one of the more interesting takeaways from the Federal Reserve’s policy update on Wednesday, Chairman Jerome Powell tried to convince traders that their thinking behind as many as six rate cuts this year is flawed. It didn’t work. On Thursday, traders largely brushed him off. Fed funds futures continued to trade around levels that mostly indicate the central bank will cut rates in six quarter-point increments by December, which would bring the fed-funds rate target down to 3.75%-4% from a current level of 5.25%-5.5%. Traders even saw a 25.8% chance of more than six cuts in 2024. However, they fell into line with Powell’s guidance on the likely timing of the first move, by pushing that out to May instead of March.Meanwhile, 10- BX:TMUBMUSD10Y and 30-year Treasury yields BX:TMUBMUSD30Y finished lower for a fourth straight session.

Government debt rallied around expectations for lower inflation, economic weakness, a policy mistake by the Fed, or a combination of all these things. In a nutshell, Powell tried to punch a hole in the market’s thinking behind what’s known as maintenance rate cuts, but it didn’t entirely work. Maintenance rate cuts are based on the view that the central bank will need to lower interest rates simply because inflation is falling and to keep borrowing costs from becoming too restrictive. This line of reasoning is largely why traders continue to cling to expectations that the central bank will lower rates by more than the three quarter-of-a-percentage-point increments which policymakers have penciled in for 2024.

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