Short-maturity Treasuries surged following the Federal Reserve’s confirmation of three quarter-point interest-rate cuts this year, easing market concerns about the central bank’s commitment to monetary policy easing. Yields on two-year debt briefly dropped to session lows after the Fed’s policy announcement on Wednesday, with traders now anticipating approximately 77 basis points of cuts this year, up from 73 prior to the release. The revised rate forecasts by policymakers indicated a median of 4.625% for the end of this year, unchanged from December, while projecting higher rates in the future. Consequently, longer-dated Treasuries experienced a decline in response.
The effective policy rate has remained at 5.33% since July, aligning with the target band of 5.25%-5.5%, thereby indicating that the median for year-end is consistent with three quarter-point rate cuts. Zachary Griffiths, the head of US investment grade and macro strategy at CreditSights, remarked that the Fed’s decision appeared more dovish than the market had anticipated, especially with no change to the 2024 median dot.
Market-based measures of inflation-expectations moved higher following the decision, partly due to officials’ increased outlook for price pressures in their quarterly forecasts. Policymakers raised their 2024 forecast for underlying inflation to 2.6% from 2.4%, and also elevated their growth forecast to 2.1% from 1.4%. Additionally, they marginally lowered their unemployment rate projection to 4% from 4.1%. Ben Emons, a senior portfolio manager at Newedge Wealth, characterized officials’ projections as bullish-hawkish, signaling optimism about the economy in terms of higher GDP and lower unemployment, while also adopting a hawkish stance on inflation. He noted that the Fed is aiming for a soft landing.
The Fed’s dot plot and the accompanying policy announcements have significant implications for market behavior and investor sentiment. The reassurance provided by the central bank regarding the anticipated rate cuts in 2024 has led to a rally in short-end bonds, reflecting the market’s response to the Fed’s commitment to easing monetary policy. The market’s reaction to the Fed’s decision and the subsequent implications for inflation-expectations and economic outlook will continue to shape investment strategies and market dynamics in the near term.
