U.S. Fed Swaps Now Shows 100 BPS Rate Cut By December

Sahana Kiran
Source – Unsplash

A lot has happened over the last couple of days in the U.S. banking sector. The U.S. Federal Reserve has recently shown a significant shift in its monetary policy stance, with the Fed funds rate swap market now predicting a 100 basis point [BPS] rate cut by December 2023. This is a significant change from previous market expectations, which priced in a 25 BPS rate cut by the end of the year.

The U.S. economy and financial markets would be significantly impacted by a 100 BPS rate drop by December, which would be a considerable change from the Fed’s prior attitude. In the upcoming months, it will be crucial to keep a careful eye on economic statistics and the Fed’s activities.

Fed: No future rate hikes ahead?

Due to the collapse of Silicon Valley Bank, the bond market is pricing in rate cuts this year as well as lowering expectations for future rate hikes. Prominent financial institutions, including Goldman Sachs and Barclays Bank, have suggested that the Feds take a break next week. Angelo Kourkafas, the investment strategist at Edward Jones, in St. Louis, elaborated on the same and said,

“The Fed’s actions, backing up deposits, are to restore confidence in the system rather than to offer stimulus or loosen conditions. But as we think about what’s played out, it’s resulted in tighter financial conditions. Even though yields have fallen credit spreads have widened. So in a way what transpired is doing some of the Fed’s work for the Fed.”

The upcoming FOMC meeting is expected to take place in seven days. A majority of them expect no interest rate hike during the meeting. A Reuters report noted that traders’ bets are equally split between a 25 BPS rate hike and a no-hike scenario. James Athey, investment director at Abrdn added,

“I have always thought that cuts would come quicker than the Fed or the market expects. I suspect this is the beginning, not the end of the stressed corporates story.”