Traders cut December rate cut bets, the door to slowing rate cuts has been opened

After Federal Reserve Chairman Jerome Powell indicated that economic resilience provides room for officials to cautiously ease policies, traders lowered their expectations for a rate cut in December, causing yields on U.S. Treasuries sensitive to policy to surge.

On Thursday, during a speech in Dallas based on a prepared statement, the two-year U.S. Treasury yield rose as much as 8 basis points to 4.36%. Swap traders reduced the likelihood of a Fed rate cut on December 18 from about 80% a day earlier to below 60%. The U.S. dollar index rose for the fifth consecutive day on Thursday.

Zachary Griffiths, head of U.S. investment-grade and macro strategy at CreditSights, stated, "The market's pricing of risks regarding the Fed's policy path on Thursday felt two-sided. Powell's remarks were more hawkish, as he took a risk management approach to future policy."

Powell said that the U.S. economy has not signaled that decision-makers need to rush to cut rates, but he did not comment on the possibility of a rate cut at the December meeting. During the Q&A session, Powell said, "If the data allows us to slow down, then slowing down a bit seems wise."

In recent days, traders have been readjusting their bets on the Fed's next rate cut, raising the likelihood of a December cut on Wednesday after the October CPI met expectations.

Although the swap market still leans towards a December rate cut, the outlook for 2025 has become more uncertain. Following Trump's victory in the presidential election last week and the Fed's recent 25 basis point rate cut, economists on Wall Street have also lowered their forecasts for interest rate trends next year.

Michael Feroli, chief U.S. economist at JP Morgan, stated, Powell's remarks may suggest that the Fed will slow the pace of rate cuts before March next year. He wrote, "We still believe that the FOMC could cut rates in December. However, today's remarks open the door to slowing the pace of easing as early as January next year."

Gennadiy Goldberg, head of rates strategy at TD Securities, also noted, "Powell's remarks open the door to slowing the pace of rate cuts, which could mean that rates remain high for longer than investors expect."

"Powell's remarks are hawkish," said Neil Dutta of Renaissance Macro Research. "I think they will still cut rates in December because policy remains restrictive, and they want to reach a neutral setting. Nevertheless, in terms of the economy, I believe Powell (and the broader consensus) is complacent. The downside risks in the short term are greater than people realize.