Powell turns hawkish! Two-year U.S. Treasury yields rise as traders cut December rate cut bets
After Powell's hawkish remarks, the two-year U.S. Treasury yield rose by 8 basis points to 4.36%. Traders lowered their expectations for a rate cut in December, with the probability of a rate cut dropping to 60%. Powell stated that the U.S. economy has not signaled an urgent need for rate cuts, and market expectations for the future rate cut path have become more cautious. Although there are still expectations for rate cuts, the outlook for a rate cut in 2025 is bleak
According to the Zhitong Finance APP, after Federal Reserve Chairman Jerome Powell made hawkish remarks, U.S. Treasury yields sensitive to policy rose. Data shows that the two-year U.S. Treasury yield increased by 8 basis points to 4.36%. Meanwhile, traders lowered their expectations for a rate cut in December, with swap trading reflecting the likelihood of a rate cut at the Federal Reserve's December meeting dropping to below 60%, down from about 80% a day earlier.
Zachary Griffiths, head of U.S. investment-grade and macro strategy at CreditSights, stated, "The risks reflected in the market's view of the Federal Reserve's policy path are two-sided. Powell's remarks are more hawkish as he takes a risk management approach to future policy."
In his speech on Thursday, Powell indicated that the U.S. economy has not signaled that policymakers need to rush to cut rates, although he did not comment on the possibility of a rate cut at the December meeting. Powell stated, "If the data allows us to slow down, then slowing down seems to be a wise move."
In recent days, traders have been adjusting their bets on a rate cut by the Federal Reserve in December. Following the release of the U.S. October CPI data on Wednesday, which met expectations, traders' expectations for a rate cut next month increased. However, while the market still leans towards expecting the Federal Reserve to cut rates next month, the outlook for rate cuts in 2025 has become more bleak. After Trump won the presidential election last week and the Federal Reserve cut rates by 25 basis points, Wall Street economists also lowered their forecasts for the interest rate path next year.
Michael Feroli, chief U.S. economist at JP Morgan, stated that Powell's remarks may suggest that the Federal Reserve will slow down the pace of rate cuts before March next year. He said, "We still believe the Federal Reserve may cut rates in December. But today's remarks opened a door, indicating that the Federal Reserve may slow down its easing as early as January next year."
Gennadiy Goldberg, head of interest rate strategy at TD Securities, stated, "Powell's remarks opened the door for a slower pace of rate cuts, which may keep rates higher for a longer time than investors expect."