US yield curve hits steepest in two years as Fed opts for big rate move
Steeper U.S. yield curve suggests more easing underway
Fed forecasts show additional 50-bps easing this year
Fed Chair Powell says will go fast or slow as appropriate
Fed funds futures bet on 74 bps cuts by end-December
U.S. 10-year yield posts best daily gain since August 21
Adds new comment, graphic, fed funds futures pricing, updates prices
By Gertrude Chavez-Dreyfuss
NEW YORK, Sept 18 (Reuters) -The U.S. Treasury yield curve on Wednesday touched its steepest level since July 2022 after the Federal Reserve cut interest rates by 50 basis points, a larger-than-usual rate reduction as the central bank grappled with a weakening labor market.
The widely tracked spread between U.S. two- and 10-year yields hit as wide as 10.2 bps and was last at 8.6 bps US2US10=TWEB. A steeper curve suggests more easing is on the way.
The Fed in a statement said it has gained greater confidence that inflation is moving sustainably toward its 2% goal and that the risks between prices and employment are roughly in balance. It slashed the benchmark overnight rate to a range of 4.75% to 5%.
Before the rate decision, futures on the fed funds rate, which measures the cost of unsecured overnight loans between banks, had been betting on a 50-bp cut, even as a majority of Wall Street economists were anticipating a 25-bp move.
"I think it was fairly anticipated that, whether it was 25 or 50 basis points, what was most important was the messaging behind 50 basis points," said Tom Hainlin, senior investment strategist, at U.S. Bank in Minneapolis.
"And if the messaging was, 'We're very concerned about a potential contraction or slowdown in the economy' ... we didn't hear that messaging. So this wasn't necessarily some preventative medicine for something bad that was going on in the economy, but more they felt that they had the opportunity to bring rates down from a high level."
Late in the session, U.S. Treasury yields rose in choppy trading. The benchmark 10-year yield rose 7.1 bps to 3.713% US10YT=RR after earlier hitting its highest in more than a week. The yield posted its best daily gain since Aug. 21.
U.S. 30-year yields increased 7.6 bps to 4.029% US30T=RR, also registering its largest daily rise in about a month.
On the front end of the curve, U.S. two-year yields advanced 4.2 bps to 3.634% US2YT=RR.
The U.S. central bank's forecast, or the so-called "dots" showed rates going down to 4.375% by the end of 2024, which suggested about an additional 50-bp of easing this year. The year-end forecast for 2025 showed additional cuts of 100 bps, and a final 50 bps in 2026 to end in a 2.75%-3.00% range.
In a press conference, Fed Chair Jerome Powell noted that the central bank is in no rush to cut rates, adding that it will move as fast or as low as it thinks appropriate.
Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management, wrote in emailed comments that the decision to go big with the rate cut and Powell's message during the press conference bolstered expectations for the soft landing scenario for the U.S. economy.
"Did the economy need a 50-bp cut today to avoid a breakdown? We don't think so; the labor market is slowing but not crumbling, retail sales data released earlier this week showed a resilient consumer, and the outlook for corporate earnings and profit margins looks solid."
Following the rate decision, fed funds futures have priced in about 74 bps in cuts over the next two policy meetings, and 190 bps of cumulative easing by the end of 2025.
The Fed’s dot plot https://reut.rs/3Xo3JtO
Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Nupur Anand; Editing by Alistair Bell and Jonathan Oatis
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
