The CME FedWatch tool shows a 100% probability that the Federal Reserve will initiate an interest rate cut of 25 basis points in September. Yardeni Research President Ed Yardeni joins Market Domination to break down the state of fixed-income markets ahead of any anticipated Fed rate cuts in late 2024.
"When you look further out over the next 12 months, the federal-funds-futures markets are basically anticipating five rate cuts over the next 12 months. Now, the futures markets have been wrong before. They could be wrong again. I do think there’s going to be a September cut, but I’m not quite convinced that there’s going to be a lot more cuts after that," Yardeni says.
He believes the bond market (^TYX, ^TNX, ^FVX) is also "skeptical" about the potential for several rate cuts over the next year. Meanwhile, the market is grappling with supply as there is a large number of bonds and notes that the Treasury will issue, leading him to expect a "4 to 5% wide trading range for the bond market. I don’t think we’re going to drop under 4%, but there are people who are convinced that’s about to happen."
Yardeni states that while the US economy is "looking pretty good," inflation is "going in the right direction."
"So what’s the rush to lower interest rates? I thought the Fed’s game plan until recently was to wait until inflation actually does get down to 2% and stays there for a few months. And now they seem to be changing the rules and saying, ‘Well, you know, we’re almost there. And that’s getting close enough. So if we continue to move closer to it, we’ll go down to 2%.’ I can’t ignore what they’re saying… I’m concerned that if they lower rates when it’s not really necessary, we’ll get a melt-up in the market. And the problem with melt-ups is they tend to be followed by meltdowns."
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