Bond Market Splits From Fed Again by Betting on 2024 Rate Cuts

Bond traders loaded back up on interest-rate-cut bets — and even the pushback coming out of the Federal Reserve did little to shake their conviction.

Policymakers kept rates steady at a more than two-decade high on Wednesday and dialed back their forecasts to pencil in just one quarter-point rate cut by year end, about half of what markets are pricing in. At his post-meeting press conference, Jerome Powell stuck to the message that the central bank is in no rush to shift gears, waiting for more evidence that its fight against inflation is moving in the right direction.

But the morning’s consumer price index report had already delivered what traders were waiting for, setting off a bond-market rally by showing that a key measure of inflation cooled to the slowest pace in more than three years.

The gains were extended in early trading Thursday after producer prices provided further evidence of disinflation and the number of weekly jobless claims exceeded forecasts. The 10-year Treasury yield slid 5 basis points to 4.26% as traders stepped up bets that the Fed will cut rates by half a percentage point this year, seeing Powell’s hawkish talk as just a signal that the central bank doesn’t want to be boxed in.

“Powell clearly wants to retain optionality,” said Michael de Pass, global head of rates trading at Citadel Securities. “Powell wanted to come across more even handed and make sure he didn’t fan the flames following the softer-than -expected inflation print.”