Interest Futures
Fundamental Analysis

Interest Futures Soar as Powell Signals Future Rate Cuts

  • Powell said the Fed would likely cut rates this year if the US economy evolved as expected.
  • Economists expect a smaller increase of 200,000 jobs in February.
  • Initial jobless claims held steady at 217,000 last week, meeting forecasts.

Interest futures rallied on Thursday after Powell confirmed that the Fed will likely cut interest rates later in the year. Consequently, short-term Treasury yields declined, reflecting an increase in rate-cut bets. At the same time, investors positioned themselves ahead of the crucial nonfarm payrolls report that could further influence the Fed’s policy outlook.

On Wednesday and Thursday, Powell stood before Congress, saying that the Fed would likely cut rates this year if the US economy evolved as expected. Still, he maintained that there was a need for evidence that inflation was steadily declining. Markets took these remarks positively, and risk appetite increased. As a result, investors were dumping the dollar and buying equities and bonds. 

However, the precise timing of rate cuts remains uncertain, as the Fed is in no hurry to lower interest rates. According to Powell, inflation is likely to return if they start cutting rates too early. On the other hand, there is a risk that the economy will tip into a recession if they wait too long to lower interest rates. 

Therefore, policymakers will continue to assess the incoming data. Meanwhile, market participants will continue speculating on the timing of the first rate cut. Currently, markets expect the first cut in June. However, this could change with more economic data, especially on the labor market.

US jobless claims (US Labor Department)

US jobless claims (US Labor Department)

There have been indications that the labor market is gradually weakening. Data on Thursday revealed that initial jobless claims held steady last week, meeting forecasts. Meanwhile, on Wednesday, data showed a slight drop in job vacancies in the US. Finally, although private employment rose in February, it missed forecasts. A weaker labor market reduces price growth as it weakens consumer spending.

Investors are now expecting the nonfarm payrolls report to come on Friday. If the employment figures beat forecasts again, bets on a June interest rate cut could decline. This is because if the US economy is still resilient, the Fed has more time to ensure that inflation reaches its 2% target. On the other hand, if the report misses forecasts, it could increase rate-cut bets, leading to a rally in interest futures. Meanwhile, Treasury yields, which reflect rate cut expectations, would slide.