Powell’s Opposition and Employment Data Shake Confidence in Bond Market Rate-Cut Speculations

(Source-The-New-York-Times)

The strength of the US economy challenges bond traders’ expectations of multiple rate cuts from the Federal Reserve this year. January’s unexpected surge in hiring has eased pressure on the central bank to implement immediate monetary policy easing, allowing time to assess inflation’s trajectory. Fed Chair Jerome Powell emphasized a cautious approach, leading traders to reduce bets on an early rate cut. Jerome Powell acknowledged the eventual need for easing as post-pandemic inflation subsides, leaving bond traders anticipating rate reductions.

However, a robust job market in January and wage growth pose challenges to the prevailing narrative of significant Fed easing. Treasuries experienced a sell-off following the strong economic figures, causing yields to rise. The economy’s resilience makes Treasuries less appealing at current yield levels, and uncertainties about the Fed’s timing have increased interest in five-year notes. 

Rates Decline:

Despite the prevailing expectation of mid-year easing, the bond market sees intermittent spikes in yields as opportunities for buyers, supported by a substantial amount of funds in money-market accounts that may shift towards bonds as short-term rates decline. Policymakers are mindful of the risk of maintaining high-interest rates for too long, considering the current rate in a range of 5.25% to 5.5%, well above the perceived neutral level for growth. As inflation decreases, there is room for policy to become less restrictive.

The resilience of the US economy continues to defy expectations as it tests the confidence of bond traders banking on a series of interest-rate cuts from the Federal Reserve in the coming year. The unexpected surge in hiring during January has provided the central bank with a breather, signaling that there is currently little urgency to initiate monetary policy easing. This respite allows the Fed to closely monitor whether inflation is on a sustainable path toward its 2% target before considering any rate adjustments.

No Hasty Actions:

Fed Chair Jerome Powell, in a recent interview on CBS’s 60 Minutes, reiterated the wait-and-see approach, cautioning against premature actions. Powell emphasized the importance of completing the job and ensuring that positive economic indicators of the last six months genuinely reflect the direction of inflation. However, Jerome Powell left the door open for future easing, particularly as the post-pandemic inflation surge subsides, leaving bond traders with the conviction that rate cuts are inevitable.

Despite Powell’s assurances of a gradual approach, the unexpected strength in the job market, with the addition of 353,000 jobs in January, challenges the prevailing narrative of an imminent aggressive easing cycle.