Investors are betting against the Fed—twice over. The first bet is the sudden turn from expecting the Federal Reserve to keep rates higher for longer to instead expecting rapid and deep cuts next year. The second bet is almost the exact opposite, that the Fed will have to keep rates much higher in the long run than it says it will. Treasury yields have come down, but at around 4.1% the 10-year yield remains more than 1.5 percentage points above the Fed’s forecast of long-run interest rates. Both bets go against the popular market dictum: Never fight the Fed. Yet, there are good reasons to think the Fed might be wrong, stronger in my view for the long-term wager than the short-term. The bet on rapid rate cuts became received wisdom remarkably quickly, which in itself is concerning. Six weeks ago the market was convinced that the Fed would keep rates high next year, with only two rate cuts priced in. Now, five cuts are priced in, against a Fed forecast in September of just one cut from current levels. The most extreme investors expect cuts really soon, with federal-fund futures showing a 14% chance of a rate cut in January, according to CME Group’s FedWatch Tool.
Source: WSJ.com: Markets
