US Treasury yields firm as Fed rate cut bets rise, signal gradual easing ahead

US Treasury yields hold firm as expectations rise for a second consecutive Fed rate cut following last week’s 50-bps reduction.
Minneapolis Fed President Kashkari and Atlanta’s Bostic both support gradual cuts, with Kashkari forecasting rates at 4.4% by the end of 2024.
Chicago Fed’s Austan Goolsbee signals more rate cuts are needed, while Bostic downplays the likelihood of future 50-bps cuts.

US Treasury yields finished the session firm amid increasing bets that the US Federal Reserve (Fed)will lower borrowing costs for the second consecutive meeting, following last week’s 50 basis points cut.

Fed officials confident in inflation trend, signal caution on further cuts

Fed officials had grown worried about the labor market, acknowledging that risks are tilted to the upside. Regarding inflation, they grew confident that prices are moving sustainably to hit the Fed’s 2% goal.

On Monday, Minneapolis Fed President Neel Kashkari said that cutting 50 basis points (bps) was correct, adding that he expects rates to finish 2024 at around 4.4%. Atlanta's Fed President Raphael Bostic echoed some of his comments, though he said that they wouldn’t be cutting rates in 50 bps chunks.

Bostic added that risks to the labor market had increased and didn’t expect the Unemployment Rate to increase much further.

Finally, Chicago’s Fed President Austan Goolsbee stated that many more rate cuts are needed over the next year and that the jobless rate is at levels many consider full employment.

Data-wise, S&P Global revealed September Flash PMIs, which portrayed a mixed reading regarding the US economy. The manufacturing activity index hit its lowest since June 2023, while the services PMI exceeded estimates of 55.3 and came at 55.4.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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