- Fed rate cut expectations remained elevated as policymakers took on a more dovish tone.
- Market participants are pricing an over 80% chance that the Fed will cut rates in September.
- The core PCE report revealed that inflation increased by 0.3%, as expected.
Interest futures eased on Friday but were heading for a slight monthly gain after wild fluctuations. Prices have swung in August due to a big shift in the Fed rate cut outlook. At the same time, the conflict between Trump and Powell has impacted interest futures.
This week, Fed rate cut expectations remained elevated as policymakers took on a more dovish tone ahead of September. John Williams said a rate cut is possible, while Christopher Waller said he is expecting such a move in September. Waller also expects more cuts in the coming three to six months.
Since the dismal jobs report at the start of the month, US Treasury yields have collapsed as rate cut expectations rose. This allowed interest futures to rally. Currently, market participants are pricing an over 80% chance that the Fed will cut rates in September.
US GDP (Bureau of Economic Analysis)
However, bets have declined since early August due to some upbeat economic reports. On Thursday, data revealed that the US economy expanded by 3.3%, compared to the forecast of 3.1%. This eased concerns about the state of the economy. At the same time, unemployment claims fell more than expected, indicating some strength in the labor market.
Meanwhile, the core PCE report on Friday revealed that inflation increased by 0.3% as expected. The next major report that will shape the outlook for rate cuts is September’s employment data. Another downbeat employment report will push up rate cut expectations, boosting interest futures. On the other hand, positive numbers would have the opposite effect.
At the same time, market participants have been closely following the conflict between Trump and the Fed. It escalated this week when the US president threatened to fire Fed Governor Lisa Cook. It raised concerns about the independence of the central bank.
Furthermore, it highlighted Trump’s determination to have a more dovish central bank and lower interest rates. However, experts have pointed out that a dovish central bank could fail to control inflation. Therefore, it could lead to a spike in inflation, which would be bearish for interest futures. Nevertheless, the future remains uncertain. However, every attack Trump makes on the Fed will keep weighing on the bond market.
