The Fed: Rate Cuts are Coming

While a rate cut is unlikely at the June 14 FOMC meeting, the July 26 and September 20 meetings are very much in play. Don't fight the US Treasury market: rate cuts are coming.

Discussion

One of three conditions would get the Fed to cut the Fed Funds Rate (FFR): underlying inflation falls to and remains on track to stay at 2%; the unemployment rate rises above 6%; or credit spreads widen to levels that obviate the need for the current FFR level. None of those conditions are in place today: FED’s inflation dashboard shows underlying inflation running above 4.5%; the unemployment rate just ticked back down to its cycle low of 3.4%; and key high yield credit spread measures sit right on their long-term averages. These conditions for cuts are well known, and have led financial market participants¹ to dismiss the rate cuts priced into the Overnight Indexed Swaps (OIS) market as recession-trigger-happy US Treasury (UST) market participants positioned offsides for what is likely to be “higher for longer” FED policy. In The WOTE’s² opinion, this is a dangerous line of thinking.