Wall Street gets reality check as Powell saps fast rate-cut bets

Jerome Powell delivered a clear message to traders eager for the central bank to start slashing interest rates: Not so fast.

The Federal Reserve chair — and the post-meeting statement from policymakers — showed confidence that the central bank is on the verge of vanquishing the post-pandemic inflation surge, lending support to speculation it will cut rates significantly later this year.

But Powell forcefully pushed back on hopes of a first move at the next meeting in March — saying it’s unlikely to act that quickly as it waits for more signs that inflation is pulling consistently back to its target.

On cue, the S&P 500 tumbled 1.6% and traders dialed back bets on a March rate cut that had once seemed a strong possibility. Yet the longer-term outlook for the world’s largest bond market remained effectively unchanged, driving Treasury yields lower and leaving futures traders still banking on a series of downward moves by the Fed this year.

“The decision to begin cutting is of great consequence — I really think it is that they don’t want to rush into it,” Jeffrey Rosenberg, a portfolio manager at BlackRock, said on Bloomberg television.

Financial markets have been waiting for a firm Fed pivot since September, when it paused the most aggressive series of rate hikes since the early 1980s.

The prospect of lower rates helped to fuel last year’s sharp stock market rally, with investors anticipating that the Fed will manage to pull off a soft economic landing that was once seen as virtually impossible. For the same reason, bond yields have pulled back sharply from last year’s peaks, loosening financial conditions by driving down rates on corporate bonds, mortgages and other loans.

This month, though, markets have remained in limbo with stocks only mustering modest gains and Treasury yields range bound.

Powell’s message — delivered after the central bank again kept interest rates steady — did little to provide any new direction, with the Fed chief underscoring the central bank’s data-driven approach and focus on taming consumer prices.

“Powell delivered the message he wanted to deliver, and some of it reflects the uncertainty or the lack of consensus across the committee,” said Michael de Pass, global head of rates trading at Citadel Securities. “The market is going to trade the range that we’ve now carved out quite clearly.”

Some investors attributed Powell’s move to downplay the prospect of a March cut to the boom in stocks and credit across Wall Street — complicating the Fed’s bid to snuff out inflationary pressures. Yet confidence among investors remains intact that the world’s most important central bank will cut enact a dovish pivot in the months ahead, even as the scale and timing of the policy easing remains subject of intense debate.

Signs of economic cooling were bolstered by data released Wednesday that showed a slowdown in hiring and wage costs. Treasuries were also bolstered after New York Community Bancorp reported an unexpected quarterly loss, evoking the worries about the US banking system that flared last year after the collapse of Silicon Valley Bank.

Those bond-market gains extended as Powell wrapped up his press conference late in the day. Two-year Treasury yields tumbled 13 basis points to about 4.2%, with rates on longer-dated securities dropping by nearly as much. The advance was pared early in the Asian trading day.

Traders also remained committed to their aggressive rate-cut bets, even if the timing of the first move may be pushed off until May. Swap contracts are still pricing in nearly six Fed quarter-point cuts by the end of December. That’s about double the median projection from Fed officials’ quarterly rate forecasts.

Investors are preparing for the Fed “moving from hikes to cuts,” Meghan Swiber, director of US rates strategy at Bank of America Corp., told Bloomberg Television. “It’s really just about the timing.”