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Expectations for interest rate cuts plummeted, but U.S. bond yields fell instead of rising! The Fed’s “secret” bond-buying plan emerges

Wonderful introduction:

Spring flowers will bloom! If you've ever experienced winter, you've experienced spring! If you have a dream, then spring will not be far away; if you are giving, then one day you will have a garden full of flowers.

Hello everyone, today XM Forex will bring you "[XM Forex official website]: Interest rate cut expectations plummeted, but U.S. bond yields did not rise but fell! The Fed's "secretly accumulated" bond purchase plan has surfaced." Hope this helps you! The original content is as follows:

U.S. Federal Reserve Board Governor Christopher Waller made it clear on Monday that he supports the central bank's decision to cut interest rates again at its December meeting. Federal Reserve Vice Chairman Philip Jefferson said at an event at the Kansas City Fed on the 17th local time that the balance of risks between the two goals of price stability and full employment highlights the need to "act cautiously when approaching neutral interest rates."

In addition to describing the recent views of the Federal Reserve, this article focuses on analyzing the possible reasons behind the Federal Reserve's hesitation in cutting interest rates from a trading perspective.

Waller supports an interest rate cut in December: focusing on the risks of labor market weakness

Waller pointed out that he has become increasingly concerned about the weakness of the labor market and the sharp slowdown in hiring activities. This position puts him firmly in the camp that supports loose monetary policy in the context of intensified divisions within the Federal Reserve - his core demand is to prevent further risks in the job market through interest rate cuts.

Waller further elaborated on his views in prepared remarks to economists in London: "I'm not worried about accelerating inflation or a sharp rise in inflation expectations. My focus is squarely on the labor market.

After months of persistent weakness, Waller said later this week The September non-farm payrolls report released at that time, as well as any other data in the xmtraders.coming weeks, are unlikely to change my view that another interest rate cut is necessary."

Although Waller has repeatedly spoken out in support of interest rate cuts in recent months, this time he updated his remarks to echo recent economic developments.

Due to the lack of official economic data due to the previous federal government shutdown, he cited a number of private sector and some public sector data to point out, the current labor market demand is weak, and consumers are facing considerable pressure; at the same time, price data shows that the impact of tariffs on inflation will not last long.

Waller emphasized that another rate cut is essentially a "risk management" move - a statement consistent with xmtraders.comments from Federal Reserve Chairman Jerome Powell.

He further explained: “I am worried that restrictive monetary policies are putting pressure on the economy, especially the impact on low- and middle-income consumers.

The December interest rate cut will provide additional protection against accelerating labor market weakness, and at the same time push policies towards a more The neutral level is closer." Waller also refuted the outside world's doubts that the Fed "blindly formulates policies" due to lack of data, saying that "even if there is no official xmtraders.comprehensive data, the various existing data are not perfect, but they are enough to allow us to form a clear and actionable judgment on the U.S. economy."

The cautious faction of the Federal Reserve Vice Chairman continues to speak out: emphasizing that interest rate cuts need to take into account the balance of risks

While Waller is calling for an interest rate cut, another voice emphasizing "prudent interest rate cuts" is also continuing to ferment.

Federal Reserve Vice Chairman Philip Jefferson said at an event at the Kansas City Fed on the 17th local time that the balance of risks between the two goals of price stability and full employment highlights the need to "act cautiously when approaching neutral interest rates."

He acknowledged that the current labor market is "slightly weak", but also mentioned that due to the previous 43-day shutdown of the federal government, which resulted in the suspension of the release of key economic indicators, "it is still uncertain how much xmtraders.complete official data will be available before the meeting."

In fact, this is not the first time that Fed officials have issued cautious signals. Last week, St. Louis Fed President Alberto Mussallem expressed a similar view; Boston Fed President Susan Collins also made it clear that the "threshold" for further easing is "high."

The core concern of these officials is that inflation is still a persistent threat in the current economy, and additional easing measures may push up inflation again, thereby disrupting economic stability.

Internal differences have intensified: it is difficult to reach consensus on the extent and pace of interest rate cuts

The next meeting of the Federal Open Market xmtraders.committee (FOMC), which is responsible for setting interest rates, will be held from December 9th to 10th. Prior to this, the Federal Reserve had cut interest rates by 25 basis points twice in a row at its meetings in September and October. As for whether it will continue to cut interest rates at this meeting, there are not only clear differences in the market, but also no consensus within the Federal Reserve.

It is worth noting that even among the camps that support interest rate cuts, there are differences in the extent of the rate cut: Waller clearly supports another 25 basis point interest rate cut, while Stephen Millan, also a trustee appointed by former President Donald Trump, advocated a larger 50 basis point rate cut in the previous two meetings. The Wall Street Journal bluntly stated that the differences within the Federal Reserve on the issue of interest rate cuts have become very serious, and the central bank is facing difficult choices in determining appropriate interest rate levels.

Market expectations plummet: probability of interest rate cutDropped from 90% to 44%

The divergent statements of Federal Reserve officials have had a significant impact on market sentiment, and the stock market has seen a downward trend recently. Looking back at September, the Fed's dot plot had suggested that interest rates might be cut once in October and once in December, but market expectations for an interest rate cut in December have continued to cool.

The U.S. interest rate forecast model CME Fed Watch Tool (CMEFedWatchTool) shows that at the end of last month, the market’s expected probability of an interest rate cut in December was still as high as 90%. It dropped to 60% last week and is currently hovering around 45%. As cautious voices continue to simmer, investors are gradually adjusting their expectations and are increasingly inclined to believe that the Federal Reserve may keep interest rates unchanged in December.

Federal Reserve decision from a trading perspective

From a trading perspective, the 10-year Japanese government bond yield recently hit an 18-year high of 1.762. In addition to market demand for hedging, it may be paving the way for the Bank of Japan to purchase bonds. Since Japan has clearly increased fiscal investment, it means that the government will issue more bonds. As the main buyer of Japanese bonds, the Bank of Japan is more cost-effective to buy bonds when the bond yield is higher.

At the same time, the Federal Reserve's hawkish remarks have also lowered expectations of a rate cut by the Federal Reserve, causing U.S. bond yields to rise. The same is true for the Federal Reserve. Controlling expectations for interest rate cuts will help U.S. bond yields stay in a higher range. The Fed has a greater demand for bond purchases after exiting QT, so it is motivated to control U.S. bond yields at a higher level.

(Monthly chart of Japanese 10-year government bond yields)

At the same time, the recent tightening of liquidity in the United States has become increasingly serious. The Federal Reserve needs to purchase government bonds to release liquidity and control the cost of buying bonds, so he has the motivation to control costs.

The Fed's purchase of government bonds is equivalent to a disguised release of liquidity to the market. By releasing liquidity, it lowers the market financing interest rate and thus retains the option of cutting interest rates. This benefit leaves room for policy manipulation by the Fed. At the same time, it purchases bonds at a lower price. If interest rates are cut in the future, the price of the bonds will increase and the positive return on the position will be obtained.

So we xmtraders.come to the conclusion that the Fed has the motivation to maintain the slowdown in interest rate cuts, and releasing liquidity can indeed solve some of the problems in the labor market, because improved liquidity can also lower financing rates.

So whether to cut interest rates in December may mainly depend on whether the United States can release labor market data that exceeds the expected recession 20 days before the Fed's interest rate meeting during the data shortage period from November to December. Secondly, it will focus on the Fed's bond purchase process and the release of liquidity. If the bond purchases are sufficient, the labor market boosting effect is not obvious, or the inflation data falls, then the Fed will have enough motivation to continue to cut interest rates because it has bought enough bonds, because no one will be stuck with money.

Technical analysis:

The U.S. 10-year Treasury bond yield is running in a strong consolidation area near the upper edge of the box. Near 4.12 is a strong support level. The current slight fall below shows that the probability of the Federal Reserve cutting interest rates has decreased.It is a positive and contrary trend, but judging from the MACD and KDJ indicators, the overall treasury bond yield is still in a bullish trend.

It can be found that the Treasury yield did not rise but fell after the recent interest rate cut expectations cooled down, which shows the power of buying Treasury bonds. At the same time, when the United States announced on October 30 that it would continue to cut interest rates by 25bp, the yield of 10-year Treasury bonds did not fall but rose instead. It also reflected that the better risk appetite at that time led people to sell Treasury bonds. It was also the day when the United States announced the end of QT. The Federal Reserve was also selling Treasury bonds before.

The above content is all about "[XM Foreign Exchange Official Website]: Interest rate cut expectations plummeted, but U.S. bond yields did not rise but fell! The Fed's "secret" bond purchase plan has surfaced". It was carefully xmtraders.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!

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Expectations for interest rate cuts plummeted, but U.S. bond yields fell instead of rising! The Fed’s “secret” bond-buying plan emerges

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Expectations for interest rate cuts plummeted, but U.S. bond yields fell instead of rising! The Fed’s “secret” bond-buying plan emerges

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