Bond Traders Brace for Fed Meeting Fraught With Wildcards, Risks

The risks for bond investors from next week’s Federal Reserve meeting go well beyond whether officials decide to raise interest rates again.

For a market that’s been betting that the central bank will pivot to cutting rates fairly soon, its updated quarterly forecasts for the policy rate and key economic indicators — set to be released Wednesday at the same time as the rate decision — will be at least as important.

The rate decision is critical of course, especially as traders remain split over whether an increase is likelier in June or July. But there’s more riding on the course of policy after that point.

The Fed’s been adamant that it’s premature to think about rate cuts this year, and traders no longer expect more than one. Still, there are plenty of bets in options and elsewhere that an economic slowdown will require lower borrowing costs.

So the economic projections of the Federal Open Market Committee members and Chair Jerome Powell’s tone during his post-decision press conference may shape the response more than the timing of the next quarter-point hike. If they suggest that conditions are peaking, wagers on a pivot would increase, while a more robust and hawkish set of predictions would spur bets on higher-for-longer rates.

“The market is positioned for a rally in long duration,” said Meghan Swiber, rates strategist at Bank of America Corp., referring to the part of the market that benefits most from declining yields, “and the ultimate thing that underpins that view is that the Fed is done with the hiking cycle.”