It’s back! Fear that the economy is so strong that the Federal Reserve won’t cut interest rates as sharply or as quickly as expected.
In the last few days, following on a surprisingly strong September jobs report, the market has gone from giving 50/50 odds to a second large 50 basis point interest rate cut at its November 7 meeting to pricing in doubts that the central bank will deliver even a 25 basis point cut.
Today the yield on the 10-year Treasury rose another 6 basis points taking the yield back over 4%, at 4.03%. That’s territory no one expected the bond market to see again soon.
The “no landing” scenario–-where the US economy keeps growing, inflation reignites and the Federal Reserve has little room to cut interest rates–had largely disappeared from the bond-market in recent months.
It only took a blowout September jobs report–with data showing the fastest job growth in six months, a surprising drop in US unemployment and higher wages–to revive it.
The worst case market fear is that the Fed either delivers no more rate cuts, or actually finds itself having to raise rates again.
In my opinion, a big part of the problem is that the Federal Reserve boxed itself in with that big 50 basis point rate cut at its September meeting. Now a cut of just 25 basis points in November will strike some in the markets as an admission that the Fed thinks it got it wrong. And no cut at all in November will seem like a policy reversal rather than prudent decision to wait on more data.
According to Bloomberg, currently swap traders are pricing in 24 basis points of easing for the November Fed meeting, meaning that a quarter-point reduction is no longer seen as guaranteed. A total of 150 basis points of easing is priced in through October 2025, down from the expectations of reductions about 200 basis points in late September.
