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Traders Price Deeper Fed Rate Cuts With Cycle Peaking Mid-2023

© Reuters.

(Bloomberg) — Traders are upping their bets that Federal Reserve policy makers will be forced to cut rates from the end of 2023 onwards — after tightening policy in earnest with a supersized rate hike in the coming months. 

In the eurodollar futures markets, the spread between the December 2023 and December 2025 contracts has dropped further into negative territory on Monday — implying a near-25 basis point cut in the federal funds benchmark over this 24-month timeframe. 

At the same time, traders in the front-end of the U.S. rates market are ever-more convinced that the central bank’s tightening cycle will be swift — but over well before the central bank is forecasting. 

Market participants are pricing three 25 basis-point hikes by May — implying a 50 basis-points increase at one of the next two meetings — with rates peaking at just 200 basis points in the middle of 2023. 

The so-called terminal rate, or the level at which the economy should cruise along without needing policy changes to speed it up or slow it down, has remained far below the central bank’s median forecast of 250 basis points, with the latter confirmed by the Fed’s latest projections known as the dot plot.

Further out the Treasuries curve, the spread between the 7- and 10-year notes remains inverted after dropping as low as minus 2.5 basis points Friday. That has prompted strategists to look for the next inversion in the U.S. Treasuries curve.

On Monday, an early curve flattening move was sparked by more comments from St. Louis Fed President Bullard, who reiterated his market-moving pronouncement Thursday that he’d like to see the policy rate 100 basis points higher by July.

All told, the ever-flatter yield curve and bets on rate cuts are both signals that the U.S. central bank will be forced to ease policy to boost economic growth down the road. 

©2022 Bloomberg L.P.

Traders Price Deeper Fed Rate Cuts With Cycle Peaking Mid-2023

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