Will It be 25 or 50? — Evening Brief – 09.17.24
The Federal Reserve is widely expected to join the global interest rate-cutting cycle on Wednesday. The fiery debate remains whether the central bank will cut by a quarter-point or a more aggressive half-point. The Fed funds futures market is currently pricing in a 65% probability of a 50-basis-point cut, although this may send a mixed message on the soft landing the central bank is hoping for, versus a 35% probability of a 25-basis-point cut.
Goldman Sachs wrote in a note late last week that it expects the Federal Reserve to cut interest rates by 25 basis points and by 200 basis points through the first quarter of 2026. This estimate is lower than the broader market expectations of 260 basis points.
However, the more important issue is whether the US bond market has fully priced in the start of less restrictive monetary policy. After analyzing recent performance data, the answer is a resounding ‘yes’ Based on a collection of exchange-traded funds (ETFs), all the primary categories of US fixed income markets have witnessed notable gains thus far in 2024. Junk bonds (JNK) have been the most profitable investment, with a 7.1% increase.
The investment-grade benchmark for US bonds (BND) has increased by 5.1% this year. Since May, the fund has been on a nearly continuous upward trajectory, likely due to the increasing likelihood that the central bank will announce a rate cut this week. The rally in JNK has grown stronger, more consistent, and lasted longer. While BND is at its highest level in two years, JNK has advanced to record highs.
“It is a close call as to whether the FOMC will cut rates by 25 or 50 basis points this week, but it’s a good bet that even the less aggressive move would be accompanied by a dovish tone to the commentary and projections,” Bryan Jordan, chief strategist at Cycle Framework Insights, Inc., wrote in a commentary provided to Connect Money. “The balance of inflation risks continues to tilt lower, especially as lending activity remains muted.”
If the economy is not as robust as optimists believe, it is probable that there will be a prolonged period of interest rate cuts on the horizon to stimulate growth. In such a scenario, returns on fixed income instruments may still have a significant tailwind.