(Bloomberg Opinion) — A recession is certain and so are rate cuts this year. That is the message of the bond market metrics that Federal Reserve Chairman Jerome Powell highlighted a year ago as the best guide to warning about economic problems in the US.
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The expected rate on the three-month Treasury bill fell to 134 basis points below the current rate. That’s down from the previous low it reached in January 2001, about two months before the US economy slipped into recession.
“Frankly, there’s some good research done by the staff of the Federal Reserve system that really says look at the short, first 18 months, of the yield curve. That’s really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it’s inverted, that means the Fed is going to cut, which means the economy is weak.” — Fed Chairman Powell on March 21, 2022
Treasuries extended the rally on Thursday after the Fed raised its benchmark rate by a quarter point as traders raised bets that the central bank will soon reverse course and start cutting interest rates. They are confident that the Fed will lower rates in September to at least undo this week’s hike.
The market view contrasts with the Fed’s guidance that they expect to raise rates at least once from here, and Powell’s comments that he does not expect any reduction in borrowing costs this year.
“Given the policy tightening thus far and the bank credit crunch, the Fed will most likely have to cut rates faster than the market currently anticipates,” TD Securities strategists, including Jan Groen, wrote in a note on wednesday “As we continue to expect the economy to slip into a recession in Q4, we stand by our call for rate cuts to begin at the December meeting.”
steep curve
The two-year US yield fell seven basis points to 3.87% on Thursday after falling 23 basis points on Wednesday. The decline in two-year yields outpaced the decline in 10-year yields, reinforcing the deeply inverted portion of the curve that many observers view as an indicator of recession. That section of the curve has often risen back above zero just before the start of a contraction in the economy.
Swap traders see around a 50% chance that the Federal Reserve will not raise rates again, after raising them 4.75 percentage points from the March 16, 2022 decision to raise them by a quarter. spot.
Traders bet on 2023 Fed cuts not Powell’s ‘base case’
(Updates with Treasury yield movements in paragraphs 3 and 6).
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