The fed fund futures market could reflect a small chance that the Federal Reserve will embark on a full-blown cutting cycle that could bring rates to zero, traders said, even as U.S. central bankers have said they would stand pat for the foreseeable future.
That doesn’t necessarily mean bond traders foresee doom for the U.S. economy, which most say is likely to continue its steady growth path this year. Rather, in the range of scenarios that investors could face in 2020, there is a risk that a sudden and unforeseen shock could force the Fed into lowering rates several times.
“There are a lot of possible scenarios. Base case, the Fed goes on hold. The next most likely scenario is slower global growth leads to an insurance cut. The third scenario is that something unexpected happens and the Fed cuts rates several times,” said Robert Tipp, chief fixed-income strategist for PGIM Fixed Income, in an interview.
In support of this interpretation, investors say the Fed is unlikely to take small steps if it is confronted with a sudden plunge in growth or inflation.
“Whenever they start cutting, they’re probably going to move to zero. If the outlook has changed enough to cut, they’ll ultimately cut to zero,” Tom Graff, head of fixed income at Brown Advisory, told MarketWatch.
The Fed has cut interest rates three times in quarter percentage point increments last year, and has said it would stay on hold ever since. Recently, senior Fed officials including Chairman Jerome Powell and San Francisco Fed President Mary Daly have also upheld this view.
Nevertheless, the widely shared expectation that the Fed is much more likely to lower rates than raise them has emboldened bond-market bulls who