Wall Street's Bet: Fed Will Shift to Rate Cuts Next Year

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Joselgina] Reports have emerged that Wall Street investors in the United States are betting that the central bank, the Federal Reserve (Fed), will continue aggressive interest rate hikes this year but will turn to rate cuts around the first half of next year.

The Wall Street Journal (WSJ) reported this on the 25th (local time) ahead of this week's Federal Open Market Committee (FOMC) regular meeting. The Fed, which has entered tightening to curb inflation, is expected to raise rates to around 3.3% by the end of the year and then begin cutting rates around June next year. The benchmark interest rate is expected to fall to 2.5% by mid-2024.

WSJ stated that this reflects growing investor perception that the Fed's high-intensity tightening is pushing the U.S. into a recession. If concerns about recession outweigh those about inflation, the Fed may shift its monetary policy stance to rate cuts.

This investor view is also confirmed by recent U.S. Treasury yield trends. The 10-year U.S. Treasury yield, which had exceeded 3%, has declined and currently stands around 2.81%.

Recent economic indicators such as a sharp drop in housing demand and contraction in consumption also signal a slowdown. In the New York bond market, the inversion phenomenon continues where the short-term 2-year Treasury yield exceeds the long-term 10-year yield. This is generally considered a precursor to a recession.

In the past, there have been cases where the Fed turned to rate cuts less than a year after starting a rate hike cycle. The Fed raised the benchmark rate by a total of 3 percentage points until February 1995 but began cutting rates in July of the same year.

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