Traders still can’t get a grip on what Federal Reserve Chairman Jerome Powell said in his post-meeting press conference on Wednesday.
Fed fund futures contracts, which allow traders to bet on where interest rates will end up by the end of the year, have slumped and climbed since the U.S. central bank’s policy update. Prices for December contracts initially slumped at the waning expectations for future rate cuts after Powell described July’s cut as more of an insurance policy against global economic uncertainty on Wednesday, suggesting further easing would not be forthcoming.
But these contracts were on the rebound on Thursday as analysts insist that despite Powell’s confusing communications, the U.S. central bank was likely to engage in further rate cuts but that it didn’t want to be viewed as beholden to market expectations for an overly aggressive easing cycle in the next twelve months.
Rising prices for fed fund futures can indicate heightened expectations for easier policy, and lower prices can reflect waning expectations.
“While I don’t believe that the Fed is one and done, they also aren’t about to depart on an “easing bonanza,” wrote Kevin Giddis, head of fixed income at Raymond James.
The 30-day fed funds futures contract for December FFZ19, +0.17% plumbed as low as 98.155 before reversing some its fall at 98.20. It, however, hasn’t completely retraced its post-Fed selloff.
Expectations for at least another 25 basis point rate cut by December stood at 87.4%, compared with 81.6% a day ago, according to CME Group data.
Some pointed to history to show that the Fed has rarely stood pat after a single cut.
Kathy Jones, chief-fixed income strategist at Schwab Center for Financial Research, noted even during the easing cycles in 1995 and 1998, an oft-cited example of “insurance” easing cycles, the Fed lowered rates three times by 25 basis points each.
Others said the weak economic data on Thursday helped spur additional expectations for easing as investors wager against the Fed’s ability to stay on hold after July’s rate move.
The Institute for Supply Management’ said its manufacturing index slipped to 51.2%dropped to 51.2%, the weakest reading since mid-2016. Still, any reading above 50% represents growth in economic activity.
“Investors think if Powell follows through on what he said, and not what the market’s telling him, we are going to have a growth problem in the U.S. The market is basically opining the economy needs more stimulus,” said Steven Oh, head of fixed income at PineBridge Investments, in an interview with MarketWatch.
