Investors are not buying the idea the Fed won't cut — not even a little bit.
On Wednesday afternoon, the Federal Reserve didn't justfor the ninth straight time in the face of a banking crisis. It also affirmed that its plans for the year remain more or less intact, and that nearly all of its leaders expect at least one more rate increase to come.
In new projections, 17 of 18 Fed policymakers envisioned raising rates again by the end of the year .Markets, on the other hand, think significant rate cuts are a near-certainty. Thursday morning, futures market pricesimplied only about a 2% chance the Fed's target rate will be the same or higher at the end of the year.
Similarly, Treasury bond markets have swung in ways that overwhelmingly indicate rate cuts are on the way, even after Powell insisted "rate cuts are not in our base case" at his news conference. On Thursday morning, two-year Treasuries were yielding 3.92%, nearly a full percentage point below the Fed's target for short-term rates.The Fed elected to keep tightening, out of a sense that the economic implications of the banking troubles, while probably negative, are highly uncertain.certain is that inflation is too high and the labor market remains very tight — implying the Fed needs to do more to bring down inflation.
In effect, Powell's message was that the Fed would only pivot toward easier money if there was unmistakable evidence of a slowdown that will pull inflation down with it. The mereBut markets are, implicitly, betting that is exactly what will happen — that strains among banks will cause them to pull back on credit, causing a recession that, in turn, crushes inflation.in bond yields that occurred during Powell's news conference Wednesday wasn't about anything he said.
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