Last week, the Federal Reserve surprised a lot of stakeholders by cutting rates by 50bps without a crisis going on. This move was reasoned in two parts, The first was that Fed Beige Book data revealed that most of the indicators were neutral or falling. Second, related to quantum was that if the same data was presented before the July meeting then rate cuts would have started from there.
This action and statements resulted in strong reactions in the Fed rate swap market. The probability of two rate cuts in the next two meetings was back on and the probability of a 50bps rate cut in November increased from 29% to 50% post-meeting.
The bond market did not show any strong moves despite higher cuts, the yields have increased from 3.6% to 3.8%. There was a strong move in its volatility index as it fell from 101 to 91. But the more curious reaction was in the reverse repo market where it was estimated to fall further from $239 Bn instead it increased from $311 Bn. However, treasury primary holdings have increased to the highest since 2020.
It will be crucial for the Federal Reserve to communicate the further changes as in another case it might end up increasing volatility in rate markets. Any upside to inflation might be not the focus right now due to seasonality. The focus would be on unemployment and economic growth indicators for now.
Comments