The Fed will definitely cut interest rates, why are bond investors not able to react in time?

There is little doubt among observers that the Federal Reserve will begin a cycle of rate cuts at its meeting next week.

View of the Fed building. (Source: Reuters)

However, according to the Financial Times, the huge expectation of a rate cut next week comes with great uncertainty about the final rate stop, the implementation roadmap, the impact on the economy and the international influences.

This could leave bond investors caught off guard if liquidity conditions do not ease significantly.

Although US economic growth has been consistently stronger than many expected, the possibility of continued “economic exceptionalism” must be weighed against the growing pressures facing low-income households.

“Many households have depleted their savings during the pandemic and taken on more debt, including maxing out credit cards. There is no consensus on whether the weakness will remain concentrated among low-income groups or spread,” the Financial Times wrote.

Senior Fed officials often emphasize the central bank's dual mandate: promoting price stability and maximum employment.

But markets have recently been on a tear, moving to view the Fed as a single-mandate central bank, with the focus now shifting from fighting inflation to mitigating any further weakness in the labor market.

Ultimately, there are differing views on when and how senior Fed officials will shift from an overreliance on data to a more directional policy stance.

The US government bond market is signaling a high risk of recession, predicting the Fed will cut interest rates by 0.50 percentage points at its meeting next week or soon after, and cut interest rates by a total of 2 percentage points over the next 12 months.

Meanwhile, credit markets are confidently betting on a "soft landing" for the world's largest economy.

This discrepancy can be resolved in an orderly manner, as long as further easing of financial conditions, including the use of idle cash, offsets further government bond issuance and continued quantitative tightening by the Fed.

Source: https://baoquocte.vn/fed-chac-chan-se-cat-giam-lai-suat-vi-sao-nha-dau-tu-trai-phieu-khong-kip-tro-tay-286151.html