A 50 basis point rate cut is still not enough! The market is betting that the Federal Reserve will cut rates by another 70 basis points before the end of the year

Zhitong Finance APP noticed that after the Federal Reserve cut the benchmark interest rate by half a basis point and hinted at further rate cuts later this year, traders increased their bets on the pace of future rate cuts in the United States.

The market currently expects the Fed to cut rates by another 70 basis points at the remaining two meetings this year, reflecting a much more aggressive stance than policymakers. On Wednesday, Fed officials predicted a further 50 basis point cut in 2024, but Fed Chairman Jerome Powell made it clear that Wednesday's decision does not represent the speed of future rate cuts.

US Treasury prices rose for the fifth consecutive month in September, but fell after the Fed decision and Powell's speech. However, Jamie Patton, Co-Head of Global Rates at TCW Group, said traders correctly predicted that the rate cut would exceed the magnitude implied by Fed officials in the so-called dot plot.

"Historically, the market has done a good job of predicting the magnitude and speed of early rate cuts," she said. "But in the last three cycles, rates have significantly underestimated the total amount of rate cuts. We believe this time will be no exception, and we will see the same theme again in this cycle."

Traders expect at least one more 50 basis point rate cut before the end of the year.

Before the Fed announced the rate cut, most forecasters predicted that the Fed would kick off the rate cut cycle on Wednesday with a quarter-point cut. However, some economists, including those at Morgan Stanley and Bloomberg Economics, expected a half-point cut, while traders had differing views.

The timing and size of the Fed's first rate cut have been a topic of discussion for several months, and this rate cut finally ended that uncertainty. Now, the focus is on the speed of future rate cuts.

Updated quarterly forecasts from officials show that the federal funds rate is expected to fall to 4.375% by the end of this year, which means the federal funds rate will be cut by another half percentage point this year. By the end of 2025 and 2026, the median is expected to be 3.375% and 2.875%, respectively.

In contrast, market-implied rate cuts would push rates below 3% by July next year.

Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, said, "The dot plot does not show further 50 basis point hikes, further confirming that this is just the beginning and is proactive rather than a trend." "This may also indicate regret for not raising rates by 25 basis points at the last meeting."

Forex strategist Alyce Andres said, "After the dust settled on the Fed decision, the bond market attracted profit-takers. Fed Chairman Jerome Powell played down the risks of an economic downturn and pointed out that the job market remains strong, which is a good sign for the steepening of the yield curve in the bear market." In the US bond market, yields closed higher. The two-year Treasury yield rose by one basis point, after previously falling by seven basis points to around 3.54%. Trading volume in October federal funds futures surged, in line with traders locking in profits related to bets on a half-percentage point rate cut.

Bob Michele, Global Head of Fixed Income at Morgan Stanley Asset Management, said: "We tell clients to just get into the bond market. Yields are falling."