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Traders Trim Bets on Fed Easing for This Years After Latest Decision

Traders Trim Bets on Fed Easing for This Years After Latest Decision

(Bloomberg) --

Traders trimmed their expectations for interest rates to fall further this year after the Federal Reserve announced a quarter-point cut to its benchmark and hinted that monetary policy may now be on hold, for one meeting at least.

Markets reacted primarily to the removal of a reference from the Fed’s policy statement to the central bank acting “as appropriate” to sustain the expansion. Speaking at a press conference Chairman Jerome Powell said officials believe monetary policy is in a good place.

Treasuries weakened, flattening the yield curve. Traders pared wagers on a fourth consecutive rate cut in December. January fed funds futures imply a rate of 1.53% at the end of 2019, having indicated 1.51% just before the release of the decision. Assuming an effective fed funds rate of around 1.57% in the wake of Wednesday’s Fed decision, the market is pricing in around 4 basis points of further easing for this year. That equates to a less than one-in-five chance of a quarter-point cut. A full quarter-point cut is priced in by the end of 2020.

The gap between the two- and 10-year yields narrowed a couple of basis points to as little as 15 basis points. The 10-year yield is down two basis points on the day around 1.82%, while the Bloomberg dollar index is up 0.3% on the day.

Market reaction showed investors reacting to “a hawkish cut,” Priya Misra, global head of rates strategy at TD Securities, said after the Fed statement. “The bar to cut any further is higher than it was before.”

Federal Reserve officials on Wednesday reduced interest rates by a quarter-percentage point for the third time this year. The FOMC altered language in its statement following the two-day meeting, to say it would monitor data as it “assesses the appropriate path of the target range for the federal funds rate.”

To contact the reporters on this story: Alexandra Harris in New York at aharris48@bloomberg.net;Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editor responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net

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