Traders give up on March rate cut by Fed as bond-market inflation expectations move higher

Traders are abandoning their expectations for a rate cut by the Federal Reserve in March as bond-market inflation expectations continue to rise. Fed-funds futures indicate a 52.6% chance of no quarter-point rate cut at the Fed’s March meeting, the highest likelihood of no action in over a month. Additionally, traders are pulling back slightly on the chances of up to seven rate cuts by December. Meanwhile, the 5-year, 5-year forward inflation-expectation rate has increased to 2.4% as of Thursday, indicating a potential uptick in long-term inflation. This shift in sentiment suggests that the market’s earlier predictions of rate cuts may be inaccurate, as inflation trends higher or remains sticky.

Traders give up on March rate cut by Fed as bond-market inflation expectations move higher

Introduction

Traders in the financial markets are losing hope in the possibility of a rate cut by the Federal Reserve in March. This shift in sentiment is attributed to the increase in bond-market inflation expectations. As inflation expectations rise, the likelihood of the Fed cutting interest rates decreases.

Traders losing hope in March rate cut

Traders are starting to abandon their expectations of an interest rate cut by the Federal Reserve in March. This change in sentiment is driven by the movement of inflation expectations in the bond market. The bond market is one of the key indicators that traders follow to gauge the likelihood of rate cuts by the Fed.

Bond market’s inflation expectations rise

The bond market’s inflation expectations have been trending higher, causing traders to reassess their expectations of a rate cut in March. The increase in inflation expectations suggests that the economy may be experiencing higher levels of inflation, which reduces the need for the Fed to cut interest rates.

Falling likelihood of rate cut in March

Based on the trading of Fed-funds futures, the probability of a rate cut in March has decreased significantly. The current levels indicate a 52.6% chance of no rate cut at the Fed’s upcoming meeting. This is the highest likelihood of no action in over a month, signaling a loss of confidence in the possibility of a rate cut.

Pullback on chances of rate cuts by December

Traders are also scaling back their expectations of multiple rate cuts by the end of the year. The market had previously priced in up to seven rate cuts, but there has been a recent reevaluation of these expectations. As inflation expectations rise, the need for rate cuts diminishes, leading to a reduction in the anticipated number of rate cuts.

5-year, 5-year forward inflation-expectation rate increases

One of the key indicators of inflation expectations, the 5-year, 5-year forward inflation-expectation rate, has been rising. This rate provides insight into where inflation is likely to settle over the long term. The recent increase in this rate suggests that the bond market is anticipating higher levels of inflation in the future.

University of Michigan data as backward-looking

While the University of Michigan data showed a decline in inflation expectations for the year ahead, it is considered to be backward-looking. This means that it reflects consumer expectations based on past events, such as falling gas prices. Traders are focusing more on forward-looking indicators, such as the 5-year, 5-year forward rate, which suggests a potential increase in inflation.

Market concerns over rising inflation

The market is becoming increasingly concerned about the possibility of rising inflation. Higher inflation can have negative implications for the economy, including reduced purchasing power and increased costs for businesses. Traders are closely monitoring inflation expectations as they assess the potential impact on monetary policy decisions by the Federal Reserve.

Contradiction to hopes of easing inflation

The increase in inflation expectations contradicts the market’s hopes for easing inflation. At the beginning of the year, investors and traders were optimistic that inflation would continue to ease, allowing for gradual interest rate cuts by the Fed. However, the recent rise in inflation expectations has dampened these hopes and raised concerns about the future trajectory of inflation.

Importance of the 5-year, 5-year forward rate

The 5-year, 5-year forward rate is a crucial indicator for market participants to gauge inflation expectations. This rate provides a more timely read on inflation compared to other indicators. Traders closely monitor this rate as it offers insights into the market’s expectations for future inflation and influences their trading decisions.

Treasury yields end higher, 2-year rate reaches one-month high

The increase in inflation expectations has had an impact on Treasury yields. Yields on Treasury bonds, particularly the 2-year rate, have ended higher, reaching a one-month high. This rise in yields signals a decrease in demand for government bonds, as investors adjust their expectations based on changing inflation dynamics.

Strong demand for inflation-protected securities

Despite the shift in inflation expectations and Treasury yields, there has been strong demand for inflation-protected securities. This suggests that investors are still seeking protection against inflation and are willing to invest in securities that offer such protection. The demand for these securities reflects ongoing concerns over the potential impact of rising inflation on the economy.

Conclusion

Traders are no longer hopeful for a rate cut by the Federal Reserve in March, as inflation expectations in the bond market continue to rise. The decrease in the likelihood of a rate cut reflects the market’s concerns over rising inflation and its potential impact on the economy. As traders reassess their expectations and adjust their trading strategies, the bond market’s inflation expectations will remain a key indicator to watch in the coming months.