Traders’ bets on Fed rate cut by June reinforced by softer US inflation
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Bond traders continued to all-but-fully price in a Fed rate cut by the June policy meeting, with some chance of an earlier move but minimal odds of action in January.
PHOTO: REUTERS
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NEW YORK - Bond traders’ expectations were bolstered for the US Federal Reserve to lower interest rates by mid-year
Interest-rate swaps showed traders continued to all-but-fully price in a Fed rate cut by the June policy meeting, with some chance of an earlier move but minimal odds of action in January.
“If we cut through the noise, it’s a pretty encouraging number,” said Mr Dan Carter, a senior portfolio manager at Fort Washington Investment Advisors. “Inflation is drifting lower, which is keeping the Fed cuts on the table. But to get the near-term cuts, you need to see more weakness in the labour market.”
The inflation release on Jan 13 marked a return towards normality after 2025’s six-week US government shutdown distorted the readings for October and November. The core consumer price index, which excludes the volatile food and energy categories, increased 0.2 per cent from November, compared with economists’ median forecast of 0.3 per cent. On an annual basis, it advanced 2.6 per cent, matching a four-year low.
The Fed has cut rates three times since September to counter signs of weakness in the labour market, decisions that have been contentious because inflation remains higher than the central bank’s 2 per cent target. Two Fed officials dissented from the December rate cut in favour of no action, while one favoured an even larger reduction.
Economists and traders see the case for additional Fed interest rate cuts resting on the health of the jobs market.
An unexpected drop in the US unemployment rate in December reported on Jan 9 spurred several Wall Street banks – including Morgan Stanley, Barclays and Citigroup – to push their forecasts for Fed rate cuts later into 2026. Strategists and economists at JPMorgan Chase, meanwhile, said they no longer expect a cut at all in 2026 and see a rate hike in 2027.
“Our take was that as inflation has taken a back seat to the employment figures, today’s data was unlikely to shift the January Fed pause pricing. That appears to be the market’s response,” wrote Mr Ian Lyngen, head of US rates strategy at BMO.
Even the latest threats to Fed independence have failed to leave a lasting mark. The Justice Department’s grand jury investigation of Fed chairman Jerome Powell revealed over the weekend has drawn to his defense several Republicans in Congress and foreign monetary authorities including the European Central Bank, Bank of England and the Bank of Canada. BLOOMBERG
