The dilemma facing bond traders has not changed one bit after the Federal Reserve meeting: amid the uncertainty that Trump brings to the economic direction, they have almost no grip on the direction of interest rates.
Due to the Fed's policy statement seeming to indicate it would maintain stable interest rates, U.S. Treasury yields briefly rose, as concerns grew that progress in curbing inflation had weakened. However, Powell quickly alleviated those worries, stating that he expects consumer price increases to continue slowing, after which U.S. Treasury yields fell back, closing nearly flat.
The stock market's reaction is similar to that of the bond market. The S&P 500 fell after the Fed announced its interest rate decision but rebounded after Powell's speech, closing slightly lower on the day, as the market remains concerned about Trump's still unclear tariff policy and the potential threat posed by low-cost AI products from Chinese AI startups to tech stocks.
"The Fed is in no rush to take further action," said Jeffrey Rosenberg, a portfolio manager at BlackRock.
The Federal Reserve decided to pause the rate cut cycle that began last September, which was completely expected on Wall Street. Since the end of last year, U.S. Treasury yields have risen sharply due to expectations of a resilient economy, stubborn inflation, and Trump's policy shifts preventing the Fed from further easing monetary policy.
The reset of market expectations largely aligns traders with the Fed, which has taken a wait-and-see attitude as it observes inflation moving toward the 2% target. Trump has also threatened to impose tariffs on imports and promised tax cuts, both of which could exert upward pressure on inflation and inject a new round of stimulus into the economy, bringing considerable uncertainty to the outlook.
Powell took almost no measures to guide the direction of the bond market. He indicated that he expects the still restrictive level of interest rates to continue to slow inflation, which seems to alleviate concerns about the Fed possibly shifting back to raising rates. He also declined to comment on how Trump's policies may impact the Fed's path, emphasizing that the central bank will follow data guidance.
Bob Michele, Chief Investment Officer for Global Fixed Income at JPMorgan Asset Management, believes, "It doesn't sound like the Fed is looking for the next rate cut opportunity either."
After Powell's remarks supported this speculation, swap traders lowered their expectations for the Fed to cut rates this year, anticipating a total cut of 43 basis points down from a previous 48, with the first cut not expected until mid-2025. This suggests that traders expect one 25 basis point cut this year, with insufficient confidence in a second cut.
Traders are no longer pricing in two rate cuts from the Fed this year.
"Currently, the bond market is more cautious," said Lon Erickson, portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico. "People are nervous about the policy impacts of the new government."
Although earlier this week, during a tech-driven stock market plunge that stimulated demand for U.S. Treasuries, the swap market increased bets on a Fed rate cut in March, the current pricing of that expectation remains quite low.
Nevertheless, traders increased their bullish bets on U.S. Treasuries ahead of the meeting, hoping the Fed would signal a possible rate cut in March.
Meanwhile, Wall Street economists have divergent predictions about the Fed's policy path, with most economists lowering their expectations in recent months. Before the January meeting, only Morgan Stanley was among the major banks on Wall Street that still believed the Fed might cut rates at its next meeting in March.
Guneet Dingra, head of U.S. interest rate strategy at BNP Paribas, stated before the Fed made its decision, "For the bond market, we believe this wait-and-see mode will continue for the next few quarters... We think the Fed will remain on hold for the remainder of 2025."
This article is reposted from: Jinshi Data