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US rate futures price in rate cut in September
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Fed's Powell strikes hawkish tone in press briefing
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Fed's Powell says U.S. economy can avoid recession
By Gertrude Chavez-Dreyfuss NEW YORK, May 3 (Reuters) - U.S. Treasury yields dropped on Wednesday after the Federal Reserve raised interest rates by 25 basis points, as expected, but signaled a pause in its tightening cycle at the next few meetings. The pause should give Fed officials space to assess ongoing challenges such as bank failures and the continuing saga of raising the debt ceiling. The Fed decision was unanimous, raising the U.S. central bank's benchmark overnight interest rate to the 5.00%-5.25% range, the 10th consecutive increase since March 2022. The accompanying statement saw a more qualified statement than in the previous one, similar to the wording used when it halted rate hikes in 2006. The Fed said "in determining the extent to which additional policy firming may be appropriate," officials will study how the economy, inflation and financial markets behave in the coming weeks and months. "It was a pretty dovish rate hike today. The expectations were that it might be a bit more of a hawkish rate hike in terms of leaving the door open to further hikes if needed," said Tom Garretson, strategist, at RBC Portfolio Advisory Group in Minneapolis. "The updated language in the policy statement does suggest the bar is going to be quite high for further rate hikes. The statement is pretty clear that today's hike is probably the last." The U.S. rate futures market has priced in a pause at the June and July meetings, and a rate cut by September. By end-2023, the market expects a fed funds rate of 4.32%, or cuts of between 50 to 75 bps.
In late afternoon trading, U.S. two-year yields, which reflect rate move expectations, were last down 12 bps at 3.86%% . The yield on benchmark 10-year notes slid 8.7 bps to 3.352%. On the very short end of the curve, the yields on U.S. one-month bills rose to 4.495%, with their price lower, as investors shunned them, given that the maturity falls under the so-called x-date of June 1, or the date on which the U.S. government could actually default on its debt.
U.S. two-month bill also edged higher, hitting a record high of 5.54% .
Fed Chair Jerome Powell in a press briefing after the rate decision struck a hawkish tone. He reiterated that the
U.S. labor market remains tight , while inflation is still high and well-above the Fed's goal.
"The Fed wants to remain in restrictive territory for an 'extended period' of time -- the higher for longer stance," wrote Action Economics in a blog post as Powell spoke.
Powell also said the U.S. has a greater chance of
avoiding a recession than falling into one, in part because wages are moderating to a more sustainable level.
The Fed chief further pointed out that support for the
25 bps hike was "very strong" among the Committee and there was
"some talk of pausing but not so much for this meeting."
Action Economics said the FOMC's inflation outlook "does
not support rate cuts."
May 3 Wednesday 4:10PM New York/2010 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 5.11 5.2488 0.022
Six-month bills 4.8225 5.0117 -0.008
Two-year note 99-254/256 3.8789 -0.101
Three-year note 100-122/256 3.5777 -0.115
Five-year note 100-176/256 3.3492 -0.117
Seven-year note 100-236/256 3.3509 -0.098
10-year note 101-36/256 3.3618 -0.077
20-year bond 101-128/256 3.7665 -0.063
30-year bond 98-244/256 3.683 -0.049
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 27.25 -1.00
spread
U.S. 3-year dollar swap 17.25 0.25
spread
U.S. 5-year dollar swap 11.00 1.25
spread
U.S. 10-year dollar swap 3.75 1.50
spread
U.S. 30-year dollar swap -39.25 1.75
spread
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Traders see Fed rate cut in September ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Sinead Carew; Graphic by Noel Randewich in San Francisco; Editing by Chris Reese, Jonathan Oatis and Deepa Babington)
Messaging: rm://gertrude.chavez.reuters.com@reuters.net))