A rate cut of 50 basis points is still not enough! The market is betting that the Fed will further cut rates by 70 basis points this year.

After the Federal Reserve cut the benchmark interest rate by half a basis point and hinted at further rate cuts later this year, traders increased their bets on the pace of future rate cuts in the United States. The market currently expects the Federal Reserve to cut rates by another 70 basis points in the remaining two meetings this year, reflecting a much more aggressive stance than policymakers. On Wednesday, Federal Reserve officials predicted a further 50 basis point cut by 2024, but Federal Reserve Chairman Powell made it clear that Wednesday's decision does not represent the speed of future rate cuts. US Treasury bond prices rose for the fifth consecutive month in September, but fell after the Federal Reserve decision and Powell's speech. However, Jamie Patton, co-head of global rates at TCW Group, stated that traders correctly predicted that the rate cut would exceed the magnitude implied by Federal Reserve officials in their dot plots. Historically, the market has done well in predicting the magnitude and pace of early rate cuts, she said. But in the last three cycles, rates have significantly underestimated the total amount of rate cuts. We believe this time will be no different, and we will see the same theme again in this cycle. Traders expect at least one more 50 basis point rate cut by the end of the year. Prior to the Federal Reserve announcing the rate cut, most forecasters predicted that the Fed would kick off a rate cut cycle with a quarter point cut on Wednesday. However, some economists, including JPMorgan and Bloomberg Economics, predicted a half point cut by the Fed, while traders' opinions were divided. The timing and scale of the Fed's first rate cut have been ongoing for several months, and this rate cut finally ended that uncertainty. Now, the focus is on the speed of future rate cuts. The updated quarterly projections by officials showed that the federal funds rate is expected to fall to 4.375% by the end of this year, implying another half percentage point rate cut this year. By the end of 2025 and 2026, the median projection is 3.375% and 2.875%, respectively. In comparison, market-implied rate cuts pricing will see rates fall below 3% by July of next year. Nathan Thooft, Senior Portfolio Manager at Manulife Investment Management, said, The dot plot didn't show a further 50 basis point hike, further confirming that this is just the start and is proactive rather than reactive. This could also suggest that they regret not raising rates by 25 basis points at the last meeting. Forex strategist Alyce Andres said, After the dust settled on the Fed decision, the bond market attracted profit-taking. Federal Reserve Chairman Jerome Powell played down the risks of an economic downturn and pointed out that the job market remains strong, which is a good sign for steepening the yield curve. In the bond market, yields closed higher. The two-year Treasury yield rose one basis point, after falling by as much as seven basis points to around 3.54%. Trading volume in October fed funds futures surged, consistent with traders locking in profits related to bets on a half percentage point rate cut. Bob Michele, Global Head of Fixed Income at J.P. Morgan Asset Management, said: We have told clients, just get into the bond market. Yields are going down.