After the Federal Reserve cut the benchmark interest rate by 50 basis points and hinted at further rate cuts this year, traders increased their bets on future rate cuts by the Fed.

Currently, the market expects the Fed to cut interest rates by an additional 70 basis points at the remaining two meetings this year, reflecting a more aggressive stance by traders compared to policymakers. Officials predicted on Wednesday that there will only be a further easing of 50 basis points in 2024, and Fed Chairman Powell explicitly stated that Wednesday's decision does not indicate the future pace of rate cuts.

After the Fed announced its rate decision and Powell made his speech, US Treasury bonds declined, as these assets have been expected to record their fifth consecutive monthly increase in September. However, Jamie Patton, Co-Head of Global Rates at TCW Group Inc., said that traders have priced in a larger rate cut than what Fed officials have suggested in the so-called dot plot, and this is correct. She said, "Historically, the market has done a good job in predicting the magnitude and speed of rate cuts. But in the recent three cycles, the rate market has 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."

Wednesday's decision ended months of uncertainty about the timing and scale of the Fed's first rate cut. Now, the focus shifts to the future pace of rate cuts.

The officials' updated quarterly forecasts show that the median prediction is for the funds rate to decline to 4.375% by the end of this year, equivalent to a total rate cut of 50 basis points. By the end of 2025 and 2026, the median forecasts are 3.375% and 2.875% respectively.

In contrast, based on the market's pricing of rate cuts, it is forecasted that the rate will be below 3% by July next year. Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, said, "The dot plot does not imply further rate cuts of 50 basis points, which further confirms that this is just a beginning and not a trend. This may also indicate that they regret not starting the rate cut with 25 basis points at the last meeting."

Alyce Andres, US Rates and FX Strategist at Bloomberg, said that after the dust settled on the Fed's decision, bond markets attracted profit-takers. Powell downplayed the risks of an economic downturn and pointed out that the job market remains strong, which is a positive sign for a steeper yield curve.

Bob Michele, the global head of the fixed income department of JPMorgan Asset Management, said, "We tell clients that all they have to do is enter the bond market. Yields are declining."

Market strategist Steve Sosnick said, "I don't understand why a 50 basis point rate cut by the Fed is really necessary, but it is clearly the message the Fed wants to convey. What surprises me is that even when the market gets what they supposedly want, they immediately want more. The new dot plot tells us that there are expected to be about 2 more 25 basis point rate cuts for the remainder of this year, but the futures market is pricing in 4 cuts. Expectations for about four rate cuts in 2025 are generally consistent, but this still means that the market expects a larger rate cut than the Fed is suggesting. It is important to note that the stock market did not soar after getting what they supposedly want (at least not yet). After seven consecutive trading days of gains, a lot of good news has already been priced in."

Due to Powell's warning not to assume that substantial rate cuts will continue, the S&P 500 index erased its 1% gain overnight.

"Powell was clear that today's decision is not a crisis rate cut, but a normalization of monetary policy from a very strict level," said Kristina Hooper of Invesco. "Given the Fed's assurance, I expect risk assets to perform well in the coming weeks, unless future economic data shows greater weakness."

Jamie Cox of Harris Financial Group, on the other hand, remains skeptical about the extent of rate cuts next year, given that more aggressive rate cuts are associated with a crisis. He noted, "We believe that traditional beneficiary sectors, including small caps, value stocks, cyclical sectors, and equal-weighted S&P 500 index, will face headwinds."

Seema Shah of Principal Asset Management said, "While the market has doubts about whether the economy needs a 50 basis point cut, the market can and should celebrate today's move and continue to celebrate in the months ahead. Our Fed will spare no effort to avoid a recession, what recession?"hard landing"Our Principal Asset Management's Seema Shah said, "While the market has doubts about whether a 50 basis point cut is needed, the market can and should celebrate today's move and continue to celebrate in the coming months. Our Fed will spare no effort to avoid a recession. What recession?"

Callie Cox from eToro has a piece of advice: "Don't be scared by the idea of interest rate cuts." She says, "The Federal Reserve is reducing rates to celebrate inflation being under control, not out of desperation. Don't give up on the stock market. We believe the Federal Reserve still has a chance to rescue the job market and, consequently, the economy by lowering interest rates. If this scenario occurs, the biggest and most expensive risk here is missing out on the ultimate rebound led by the less attractive part of the market."