Wall Street giants do not believe that the Federal Reserve will aggressively cut interest rates, Castle Securities expects only a further 25 basis point rate cut within the year

Castle Securities stated on Wednesday that the strong US economy and persistent inflation will prompt the Federal Reserve to cut interest rates only once for the remainder of this year, totaling a 25 basis point cut.

Michael de Pass, Global Head of Interest Rate Trading at Castle Securities, said in an interview with Bloomberg TV:

"We believe that based on the current economic situation and inflation stickiness in the US, the market's expectations for the rate cut may be somewhat excessive. Although the market expects a total rate cut of about 50 basis points this year, I dare say that the Federal Reserve will ultimately only cut rates by 25 basis points for the rest of the year."

This forecast is below the current market consensus. Following the release of a strong September non-farm payroll report in the US, Wall Street drastically reduced its rate cut expectations. The market currently estimates a 0% chance of a 50 basis point rate cut by the Federal Reserve in November, with a total cut of about 47 basis points by the end of 2024, significantly lower than the 75 basis points before the non-farm payroll report. De Pass stated that this adjustment is reasonable but still too aggressive.

Federal Reserve officials speaking one after another this week have also tempered market expectations.

"Third in command at the Federal Reserve," New York Fed President Williams said on Tuesday that the US economy is ready for a "soft landing," supporting a 25 basis point rate cut in November. St. Louis Fed President Mester, a 2025 voting member, said on the same day that the cost of moving too fast and too aggressively is higher than the cost of acting slowly, and a gradual rate cut would be appropriate.

Dallas Fed President Kaplan, a 2026 voting member, said on Wednesday that after the 50 basis point rate cut in September, the Federal Reserve should cut rates at a slower pace.

These statements align with Fed Chair Powell's hawkish remarks at the National Association for Business Economics (NABE) annual meeting on September 30, where he indicated that if economic data remains consistent, there may be two more rate cuts this year, each by 25 basis points.

The next inflation litmus test will be the CPI released on Thursday and the PPI inflation data on Friday.

The market expects a slight 0.1% month-on-month increase in CPI for September, the lowest increase in nearly three months, with a 2.3% year-on-year growth, the sixth consecutive month of slowing growth and the mildest since early 2021. Core CPI data, excluding food and energy price fluctuations, is expected to rise by 0.2% month-on-month and 3.2% year-on-year.

De Pass stated at the Castle Securities Global Macro Conference on Wednesday:

"This shows that inflation is still well above target, and the Federal Reserve needs to fulfill its dual mandate. Previously, we saw a fairly strong employment report, and now people's attention is turning back to inflation. We must be concerned that inflation may not reach the target."

De Pass also mentioned that if the Federal Reserve does indeed cut rates by only 25 basis points as we predict, market participants can look for short-term trading opportunities based on the potential rate cut action by the Federal Reserve, as such policy changes typically have a more direct impact on short-term rates.

With the reassessment of the Federal Reserve's rate cut prospects, bond market volatility has surged significantly.

After the September non-farm payroll report dampened rate cut expectations, the yields on 2-year and 10-year US Treasuries briefly rose above 4%. Meanwhile, futures positioning indicators show that more traders are betting on losses in US Treasuries. The ICE BofA MOVE Index soared to its highest level since January on Monday The rise of the MOVE index indicates that investors expect greater volatility in future bond yields, which is usually a reflection of market uncertainty about future interest rate paths. de Pass also predicts that the volatility of US bond yields will continue to accelerate, stating:

"The economy is at a turning point, with multiple conflicting forces in the market (some factors may drive economic growth, while others may lead to a slowdown). I believe that future market uncertainty and volatility will increase, providing trading opportunities for investors."