Market converges with Fed projections

Despite the Fed’s interest rate messages in recent years, bond traders who have been pricing in different expectations are finally converging on the Fed’s projections. Investors have begun pricing in four, at most five, rate cuts in derivatives markets for this year. This represents a significant pullback from the expectation of at least seven rate cuts in December. However, Fed members’ projections still point to three interest rate cuts totaling 75 basis points. Penso Advisors Founder Ari Bergmann, who stated that markets are pricing in more correctly today, commented, “We got the message from the Fed that they want to make an insurance rate cut because they see inflation falling.” The median expectation for the US January annual CPI data to be released on Tuesday points to a significant decline from 3.4 percent to 2.9 percent. In contrast, core inflation is expected to decline slightly from 3.9 percent to 3.7 percent. Contradicting the Fed has cost bond traders dearly in the recent past. Traders who could not predict how far the Fed would go in increasing interest rates suffered losses in US Treasury bonds in 2022, and were wrong again during the banking crisis in March 2023 when they predicted that the Fed would pause interest rate hikes.