Chart of the week: US bond market prices in more rate cuts

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Financial markets are now anticipating that the Federal Reserve (the Fed) will cut US interest rates not once, but twice in 2019. On 28 May, the probability that the US central bank will lower the federal funds rate by the end of 2019 rose above 40%, according to futures prices, exceeding for the first time expectations of a single rate cut.

Market concerns over the outlook for US ecoonmic growth and the anticipation of rate cuts from the Fed have pushed the yield of the benchmark US Treasury bond down to 2.23%, its lowest since September 2017.

Source: Bloomberg, BNPP AM, data as of May 2019

However, the Fed has given no indication that rate cuts are coming. Last week John Williams, Vice Chair of the Federal Open Markets Committee, said that while inflationary pressures are “essentially non-existent”, he saw no prospect of a need to adjust monetary policy in the near future. Financial markets are thus pricing rate cuts in the absence of any validation by policymarkes.

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