It's September 2024.
The Fed cuts interest rates by 50 bps in an effort to head off a slowdown in the labour market and projects two more cuts by the end of the year and two more in the following year. Fed Chair Powell frames the rate cut as insurance given the soft labour market data and ongoing disinflation. The market doesn't believe the Fed's forecast and prices three rate cuts by year-end and four more in the following year.
In the following weeks, the US data surprises to the upside, Fed Chair Powell pushes back against the aggressive market pricing and we get a strong NFP report in October. The market realises it's wrong, expectations turn more hawkish, the US dollar rallies across the board and Treasury yields rise.
It's September 2025.
The Fed cuts interest rates by 25 bps given the slowdown in the labour market despite a pick up in inflation. Projects two more cuts by the end of the year and one more in the following year. Fed Chair Powell frames the rate cut as a risk management move due to the weakening labour market. The market doesn't believe the Fed's forecast and almost fully prices three cuts in the following year.
Treasury yields bottom on the Fed's decision and consolidate. The day after the Fed's decision, US jobless claims come out much better than expected and Treasury yields and the US dollar rise. The focus remains on the US data with US PMIs, Jobless Claims and the NFP report coming up in the next two weeks.
In case of strong US data, we will likely get a hawkish repricing in interest rates expectations and a rally in the US dollar and Treasury yields. On the other hand, weak data could strenghten the market's view and keep weighing on the US dollar and Treasury yields.
Will the market be wrong...again?
