Bond Market Rate-Cut Bets Rattled by Powell Pushback, Jobs

The US economy is testing bond traders’ faith that the Federal Reserve will deliver a series of interest-rate cuts this year.

The unexpected surge in hiring in January showed there’s little pressure on the central bank to start easing monetary policy just yet, giving it time to see if inflation is headed sustainably toward its 2% target.

Fed Chair Jerome Powell reiterated such a wait-and-see approach from last week — which drove traders to slash bets on a first rate cut before May — in an interview on CBS’s 60 Minutes Sunday evening.

The “danger of moving too soon is that the job’s not quite done, and that the really good readings we’ve had for the last six months somehow turn out not to be a true indicator of where inflation’s heading,” Powell said in the interview.

But Powell left little doubt that the central bank will start loosening this year as the post-pandemic inflation surge subsides. That’s left bond traders convinced rates are coming down at some point — even as questions mount about how far the central bank will go.

“The Fed can deliver three to four rate cuts as the rate of inflation keeps coming down,” said Kevin Flanagan, head of fixed income strategy at Wisdom Tree Investments. But he said the jump in job growth and wages in January do “challenge the Treasury market’s narrative that the labor market is going to soften to the point where you’re going to have aggressive Fed easing.”

Rate Cut Pricing Pushed out after Jobs Report