Traders bet on the Fed's active interest rate cuts, and now it seems they may be wrong again.
From now until the end of next year, traders bet that the Fed will actively cut interest rates, but it seems they may be wrong again.
According to Jim Reid, a strategist at Deutsche Bank, traders expect to see a 175 basis points rate cut in the next 18 months, the highest expectation since early March. Reid pointed out that, with the exception of one example in the mid-1980s, when real interest rates were still very high, the Fed only made such a significant interest rate cut when the U.S. economy was contracting.
Although an economic recession is not impossible before the end of next year, recent data shows only mild signs of cooling in the economy and labor market. Reid believes that traders may be acting on an "inherent dovish rate bias" rather than foreseeing a downturn in the economy. Since the Fed began raising borrowing costs in March 2022, this is the eighth time that traders have made aggressive predictions of rate cuts, only to have them ultimately overturned.
Reid also pointed out two possible scenarios that could lead the Fed to cut interest rates seven times over the next 18 months. One is that the US economy enters recession before the end of 2025, and the other is that the uniqueness of the post-Covid era allows the Fed to significantly reduce lending costs and not trigger inflationary rebound even without a recession. The latter scenario would be a "perfect soft landing", although technically possible, Reid believes this possibility is unlikely.
Investors hope that Federal Reserve Chairman Powell will provide more guidance on the central bank's rate-cutting plans later this week, as traders are almost certain that rate cuts will begin in September. Whether Powell hints that a rate cut will indeed occur in September could have a significant impact on the market. Since the June inflation report came in below expectations, the market has shifted to small-cap stocks, while tech giants and semiconductor stocks have retreated.
According to FactSet data, July rose 11.7%, while the $SPDR S&P MidCap 400 ETF (MDY.US)$ rose 10.6%. By comparison, technology-led stocks fell 2.1% over the same period. $iShares Russell 2000 ETF (IWM.US)$Increased by 11.7%, while$Spdr S&P Midcap 400 Etf Tr Unit Ser 1 Standard & Poors Dep Rcpt (MDY.US)$increased by 10.6%. Compared with this, the technology-dominated$Nasdaq Composite Index (.IXIC.US)$Compared with that, the trade dominated products up 4.01/12.88/0.06 billion yuan respectively.
Editor/new