Wall Street is pricing in a more than 16% chance of a half-point reduction in key interest rates on Wednesday as the main yield curve between 2-year Treasury TMUBMUSD02Y, -6.31% and 10-year Treasury notes TMUBMUSD10Y, -6.99% inverted early in the session. Although the current expectations for a 50-basis-point cut aren’t high statistically they do represent a big jump from a day ago when expectations for a half-point cut were at 3.8% based on federal-funds rates, according to CME Group data. The flattening and inverted yield curve has been an accurate predictor of economic recessions. A yield curve inversion along the 2-year and 10-year spread has come before the last seven recessions. The warning signal from the bond market has driven the stock market decidedly lower, with the Dow Jones Industrial Average DJIA, -2.03%, the S&P 500 index SPX, -2.05% and Nasdaq Composite Index COMP, -2.28% were all down by at least 1.5%. An inverted yield curve represents the shape of bond rates from shortest to longest and tends to move upward because investors require a richer return to lend money over a longer period. So, an inversion of that naturally upwardly sloping curve has signified that investors harbor concerns about the near-term environment, it also reflects that monetary policy and financial conditions may be too tight for the broader economy. Investors have been calling for more substantive action by the Fed in easing monetary policy. However, at the conclusion of the most recent policy meeting on July 31, Fed Chairman Jerome Powell described the rate cut implemented then as a midcyle adjustment and not the start of an easing trend, which helped to unsettle markets hoping for a more accommodative Fed.
Wall Street bets of a 50-basis point Fed cut jump as yield curve inverts stocks sink
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