Will the Markets Care as Fed Chair Powell Updates Rate Cut Bets?

Will Federal Reserve Chair Jerome Powell rock the boat on rate cut expectations?

• The markets have spent over two months reducing the 2025 Fed rate cut bets
• Near-term adjustment might be done for now, leaving room for a correction
• Benign comments from Fed Chair Powell may lift bonds and weigh on the dollar

Will financial markets pay attention to yet another round of rhetorical steering from Federal Reserve Chair Jerome Powell? That question is front and center as the central bank chief speaks at the New York Times DealBook Summit. Powell will no doubt field a blistering array of policy questions in what is being billed as a “moderated discussion.”

When the U.S. central bank finally began its long-anticipated interest rate cut cycle in September, the markets judged its dovish zeal as overdone. The policy-steering Federal Open Market Committee (FOMC) issued a jumbo 50-basis-point (bps) cut and penciled in 150bps more by the end of 2025. Traders lifted bond yields and the U.S. dollar in response.

The markets have spent over 2 months repricing Fed rate cut bets

This seemingly counter-intuitive reaction speaks to the broad-based belief that the Fed is unlikely to make good on such expansive stimulus as the start of rate cuts alongside brisk economic growth rebuilds inflationary pressure. Price growth expansions priced into the bond market – so-called “breakeven rates” – promptly shifted higher.

Two months into this wave of repositioning, the 10-year Treasury bond fell nearly 6% and the U.S. dollar added almost 8% against an average of its top currency counterparts. For its part, the Fed has moderated its rhetoric to stress that it is not on rate-cut autopilot and would respond to reflation risk, even as it eased by 25bps in November.

As it stands, Fed Funds interest rate futures imply the probability of another 25bps rate cut at this month’s FOMC meeting at a commanding 73.8%. From there, the markets price in 63bps in cuts for 2025. That amounts to least two standard-sized reductions and a 52% chance of a third one.

Will Fed Chair Powell send traders scrambling again?

Minutes from November’s FOMC conclave showed that “a large majority” of participants expected to cut rates by 25bps in December. That lines up with September’s forecasting, which planned for 100bps in cuts for 2024, with 50bps upfront and two meetings left on the calendar.

If the next policy move is thus an almost-foregone conclusion, the outlook next year is the subject of active speculation. On that front, the baseline market view of 130bps in cuts when the Fed began easing in September has been cut in half. Will Powell’s comments inspire ongoing change?

On balance, that seems unlikely. The FOMC minutes showed a strong majority expected inflation to be on a sustainable path to the 2% objective, despite some recent stalling. “Many” participants bemoaned data volatility and stressed focusing on underlying trends. Powell will probably try not to rock the boat, especially with key jobs data pending.

The benign passing of Powell’s speech without earth-shaking headlines may be seen as a green light to continue a cautious correction taking shape over the past two weeks. Bonds have started to edge higher, and the U.S. dollar has backpedaled. Such moves may yet have room to run.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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