Fed Swaps Price In Less Than 50% Chance Of A June Rate Cut
Bond traders continue to lower their expectations for Federal Reserve interest-rate cuts this year and no longer consider a June rate cut likelier than not.
(Bloomberg) -- The two-year Treasury note’s yield climbed to its highest level since December as expectations for Federal Reserve interest-rate cuts this year continued to erode, with traders dropping the odds of a June rate cut to less than 50% and economists at Goldman Sachs Group Inc. revising their forecast.
The US two-year yield rose only as much as 2 basis points from Friday’s closing level, but reached 4.749%, the highest level since Dec. 11.
Swap contracts that predict decisions by the US central bank repriced to higher rate levels, with the June contract’s approaching 5.21%. At that level it prices in less than half a quarter-point drop from the current effective federal funds rate of 5.33%. The Fed’s target band for that rate has been 5.25%-5.5% since July.
Fed policy makers are slated to conclude a two-day meeting on Wednesday. While expected to leave the target band unchanged, they’ll make new quarterly forecasts for the economy and monetary policy. The latest ones, from December, anticipated three quarter-point rate cuts this year. Since then, higher-than-expected inflation readings have stoked speculation that the new median forecast will be less dovish.
“There is still way too much liquidity out there,” Michael Contopoulos, director of fixed income at Richard Bernstein Advisors, said. “Financial conditions are easing, credit is flowing freely, unemployment is low and inflation is stubborn, earnings growth is accelerating and speculation is rampant. This is not an environment conducive to cutting interest rates.”
Economists at Goldman Sachs changed their forecast for Fed monetary policy to call for three quarter-point interest-rate cuts this year instead of four, “mainly because of the slightly higher inflation path,” a group led by Jan Hatzius said in a March 17 note.
They continue to expect the first rate cut in June, four cuts in 2025 and a final one in 2026, leaving their forecast for terminal rate unchanged at 3.25%-3.5%.
--With assistance from Edward Bolingbroke.
(Adds Treasury yields, Goldman Sachs forecast change and comments.)
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