Fed Signals Rate Cuts, Pushing Bond Yields Lower

What’s going on here?

Federal Reserve Chair Jerome Powell signaled that interest rate cuts might start in September, causing US bond yields to drop.

What does this mean?

Powell mentioned that further cooling in the job market is undesirable and shown confidence in reaching the Fed’s 2% inflation target. Following his comments, the CME FedWatch Tool indicated a certain 25 basis points (bps) cut in September, with a 40% chance of a 50 bps cut. These future rate cuts will depend on incoming data, the economic outlook, and risk balance. The upcoming US non-farm payrolls and unemployment data will be key in determining the Fed’s next steps.

Why should I care?

For markets: The ripple effect of rate cuts.

Indian government bond yields fell slightly, mirroring movements in US bond yields. The benchmark 10-year yield ended at 6.8509%, down from the previous 6.8591%. The fixed income head at Trust Mutual Fund highlighted expectations of US rate cuts totaling 100 bps within this year and an additional 125-150 bps in 2025, which could lead to favorable conditions for rate markets globally.

The bigger picture: Global inflation dynamics in play.

While the Reserve Bank of India has kept rates steady due to rising food prices preventing headline inflation from hitting the central bank’s 4% target, inflation in India is projected to moderate due to a good monsoon. This could lead to rate cuts during the January-March quarter. Powell’s shift and the Fed’s rate cuts will likely influence global monetary policies, shaping the economic strategies of other nations.

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Originally Posted August 26, 2024 – Fed Signals Rate Cuts, Pushing Bond Yields Lower