Traders cut back on Fed rate cut bets, with the probability of a rate cut in June dropping to 50%, hitting a new low for the year

Amid a rebound in risk appetite, market expectations for an early Fed rate cut before mid-year have significantly cooled.

The money market now prices in a 50% chance of a 25 basis point cut by the end of June, the lowest level this year, indicating investors are reassessing the easing path.

Swap contracts show that the expected rate cut before mid-year is only about 12.5 basis points, down from 27 basis points earlier this month. The cumulative rate cut expected before year-end has also fallen back to 52 basis points from around 62.5 basis points early last week.

The Federal Reserve maintained the federal funds rate in the 3.5%–3.75% range last month, after three consecutive rate cuts in the fall of last year. Traders generally expect the March meeting to hold steady.

Expectations for rate cuts have sharply retreated, with a 25 basis point cut in June now priced at 50%

As risk assets improve, market pricing for easing policies is gradually converging. The latest swap data shows investors are only factoring in about a 12.5 basis point rate cut before mid-year, a slight decline from 13 basis points on Tuesday, and well below the 27 basis points seen earlier this month.

This means the probability of a 25 basis point rate cut at the June meeting has fallen to 50%, the lowest since the start of the year. This shift reflects a weakening market confidence in “early easing.”

Looking at the full-year path, traders now expect a total of about 52 basis points of rate cuts by year-end, down from 53 basis points previously and from 62.5 basis points early last week. Overall, the market is moving toward a “less and later” rate cut pace.

Officials send cautious signals, emphasizing inflation remains above target

The shift in policy signals is a key reason for the market’s re-pricing.

On February 24, Goolsbee, speaking at the National Business Economics Association annual meeting in Washington, stated that it is not appropriate to cut rates further until more evidence shows inflation is continuing to decline. He noted that the Fed previously paid a price for “misjudging inflation as temporary,” and should avoid repeating that mistake.

He bluntly said, “3% inflation is not good enough,” which is not a guarantee made when the Fed committed to a 2% target. Until inflation returns to the target range, premature or overly aggressive rate cuts would be unwise.

The minutes from the January meeting released last week also showed that many officials want to see more progress on inflation before supporting further rate cuts. This statement reinforces market expectations of a hold in policy in the near term.

US Commerce Department data shows December PCE at 2.9%, core PCE at 3%. While significantly lower than recent highs, they remain above the 2% policy target. Goolsbee further pointed out that with inflation at 3%, it’s hard to say current rates are “clearly restrictive.” This suggests the Fed’s room to cut rates may be limited.

He previously voted against the December rate cut, advocating for holding rates steady. However, under the rotation system, he will participate in FOMC decisions as a non-voting member this year.

Market impact: risk appetite recovers, but easing pace becomes more cautious

From a market perspective, the retreat in rate cut bets coincides with rising risk appetite, indicating increased confidence in economic resilience.

However, the adjustment in rate path expectations also means that the bond market’s pricing of rapid easing may be revised downward in the short term. If upcoming inflation data does not improve significantly, market confidence in an early rate cut could further weaken.

Overall, current pricing has shifted from an earlier “aggressive easing” expectation to a more cautious, gradual approach. For investors, policy uncertainty will remain a key factor influencing asset prices in the coming months.

Risk warning and disclaimer

Market risks exist; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Investment is at your own risk.