As long as the job market remains strong, it will be difficult for the Federal Reserve to implement another "50 basis point rate cut." What the U.S. bond market fears is "no rate cut in November."

The minutes of the Federal Reserve meeting were "hawkish", completely extinguishing hopes of another 50 basis point rate cut, while the bond market is even more pessimistic, already pricing in no rate cut for November.

Analysis believes that as long as the labor market remains stable, the Federal Reserve is unlikely to cut rates significantly again. In the case of strong employment, the only factor that could lead the Federal Reserve to continue cutting rates is moderate CPI. Once inflation picks up, the market is concerned that the Federal Reserve may pause its rate cuts in November.

September's significant rate cut divergence is larger than expected

In September, the Federal Reserve initiated an easing cycle with a 50 basis point rate cut, breaking the "gradualism" that the Federal Reserve has always held in interest rate adjustments. Powell characterized this significant rate cut as a recalibration at the press conference, stating that a 50 basis point rate cut will not be the norm.

The minutes released overnight showed that the divergence in this decision three weeks ago was larger than expected, further lowering rate cut expectations.

Even though only one person voted against the 50 basis point rate cut in the end, during the meeting discussions, "some" policymakers favored the more conventional 25 basis point rate cut, and "several" individuals may have originally been inclined to support a 25 basis point rate cut.

The minutes stated that "the vast majority" supported a 50 basis point rate cut. Derek Tang, economist at LH Meyer/Monetary Policy Analytics in Washington, called this a "rare statement," saying, "They can't say that almost everyone supports it."

Due to the resilience of the U.S. economy and labor market, some Federal Reserve officials have recently indicated that they are leaning towards a more cautious approach.

St. Louis Fed President Alberto Mussalem said on Monday, "Given the current economic conditions, I believe the cost of easing prematurely and excessively outweighs the cost of easing too late." Mussalem will become a voting member of the Federal Open Market Committee in 2025.

San Francisco Fed President and voting member Mary Daly said on Wednesday, "Based on my economic forecast, cutting rates two more times or once this year is indeed beyond what I had in mind."

Bond market more pessimistic about rate cut in November

On Wednesday, U.S. bond yields rose across the board as traders reduced bets on further rate cuts by the Federal Reserve this year ahead of Thursday's inflation data release.

U.S. Treasury yields generally rose by 5-6 basis points, with 2-year and 10-year yields surpassing 4%, and 10-year and 30-year Treasury yields rising to their highest levels since the end of July Bryce Doty, the bond fund manager at Sit Investment Associates, stated that the market is concerned that the Federal Reserve may pause rate hikes at the next meeting. "If the job market remains strong, the only factor that could lead the Fed to continue cutting rates is moderate CPI."

After the strong non-farm payroll data released last Friday, bond traders have abandoned bets on another 50 basis point rate cut in November. According to swap contract data, the probability of a 25 basis point rate cut next month is not 100%, currently around 80%, with a close to 20% chance of no rate cut.

The market currently still expects a quarter-point rate cut by the end of the year to be certain. However, if the September CPI data released on Thursday fails to show a cooling of inflation, it may weaken the possibility of a rate cut of more than 25 basis points this year.

Consensus expectations indicate that the CPI for September, released on Thursday, is expected to show a slight increase of 0.1% month-on-month, the lowest increase in nearly three months, with a year-on-year growth of 2.3%, marking the sixth consecutive month of slowdown and the mildest growth since early 2021.

Despite the market's relatively optimistic inflation expectations, some analysts warn that investors should remain cautious as inflation risks have not completely disappeared. The surge in oil prices due to Middle East conflicts and the uptick in wage growth in the non-farm payroll data all signal that "inflation is not dead" in the United States. Read more