Despite Powell "pouring cold water," the market still wants more rate cuts!
The market expects the Federal Reserve to continue cutting interest rates by 70 basis points within the year, bringing the interest rate below 3% by July next year; in comparison, the Federal Reserve's dot plot suggests a further 50 basis points cut within the year, with the median interest rate expectation by the end of next year at 3.375%
As the Federal Reserve cut interest rates for the first time, the market's focus has shifted to the future rate-cutting path, with an expected additional 70 basis points cut within the year.
Overnight, the Federal Reserve made a significant 50 basis points cut, while the dot plot released suggests a further 50 basis points cut within the year. Powell later stated at the press conference "managing expectations", emphasizing that the Federal Reserve is just "moderately adjusting its policy stance" and will make decisions based on economic data:
"The committee is not in a hurry, we will take action at the pace we deem appropriate."
"Data will drive monetary policy choices, rate cuts will accelerate, decelerate, or pause as needed."
"A 50 basis points cut should not be seen as a new rhythm for the future."
Powell's remarks did not dampen the market's rate-cut expectations. Although expectations for rate cuts within the year have decreased, the market is still pricing in the Federal Reserve to continue cutting rates by 70 basis points at the next two FOMC meetings this year.
Looking medium to long term, the implied rate-cut pricing in the market shows that the federal funds rate level will drop below 3% by July next year, while the dot plot's median expectations for the federal funds rate by the end of 2025 and 2026 are 3.375% and 2.875%, respectively.
Powell also mentioned that there is still a wide range of uncertainty in assessing the neutral rate, but "we will not return to the era of ultra-low interest rates":
"Intuitively, most people, or many people, would acknowledge that we may not return to the era where tens of trillions of dollars of sovereign bonds trade at negative rates, or where long-term bonds trade at negative rates. The future neutral rate may be much higher than back then."
Jamie Patton, Co-Head of Global Rates at TCW Group, stated that traders are pricing in rate cuts more aggressively than Federal Reserve officials, which is correct:
"Historically, the market has done well in predicting the quantity and speed of early rate cuts."
"However, in the last three cycles, forecasts for the magnitude of rate cuts have been severely underestimated. We believe this time will be no exception."