![]() The 2-month T-bill rate led the decline in rates, as traders factored in some likelihood of a resolution on the U.S. the two objectives of most central banks, to 1) control inflation and 2) maintain full employment. Meanwhile, Treasurys rallied as investors flocked to the safety of government debt, pushing yields mostly lower on Thursday. the use of the money supply to influence macroeconomic aggregates, such as output, inflation, and unemployment. These policies faired poorly in the past, leading governments to look elsewhere to control the economy. Borrowing costs are at their highest level in 16 years after the Fed hiked its policy rate for a 10th straight time on May 3. Governments can use wage and price controls to fight inflation. They priced in a 41.6% chance of the first cut occurring in July after accounting for a pause by the Fed in June - which would bring the fed funds rate down to a range of 4.75%-5% versus the current level of 5%-5.25%. We don’t think that’s the base case and we think the market’s expectations for the probability of rate cuts seem excessive.” As of Thursday, fed funds futures traders were mostly pricing in a total of three quarter-of-a-percentage-point rate cuts, plus a decent chance of a fourth cut, by year-end. If it becomes systemic, the Fed has to keep that in mind. ![]() However, “one of the known unknowns right now, and one of the wild cards, is how difficult banking stress can become. The Fed will want to see inflation between 2% and 3% before it’s even thinking of cuts,” Reynolds said via phone. “We think we are going to see a 3%-handle on inflation at the end of the year, and even then that’s still pretty hot. Central banks use several methods, called monetary policy, to increase or decrease the amount of money in the economy. The Fed has been as clear as it can be and said it doesn’t see rate cuts, and Powell has gone out of his way to say rate cuts are not in the calculus for this year,” said Michael Reynolds, vice president of investment strategy at Glenmede, which oversees $41 billion in assets from Philadelphia. Read: Why the stock market and the Fed are on ‘two different pages’ after Friday’s jobs report “The market has been at odds with the Fed for some time now on the topic of rate cuts. ![]() Markets, on the other hand, are standing by the view that the Fed will cut rates anyway by December, despite Chairman Jerome Powell’s best efforts to push back against that scenario any time soon. Policy makers have been steadfast about the need to bring down inflation, though they provided just enough flexibility in their May 3 policy statement to open the door to a pause from rate hikes in June. See also: PacWest leads regional-bank stock declines as it reports a deposit drop in early May Thursday’s developments point to a continuing gulf in expectations between markets and the Fed. That likelihood dropped to 41.6% by the end of the New York session. Earlier in the day, as other regional banks’ shares were also falling, traders briefly priced in a 50% likelihood that Fed officials will cut borrowing costs by at least a quarter of a percentage point in two months’ time.
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