Following the Federal Reserve's recent announcement, short-maturity Treasuries saw an uptick as the central bank confirmed its intention to proceed with three quarter-point interest rate cuts this year. This move has alleviated concerns among investors that the Fed might scale back on its monetary policy easing efforts.
After the policy update, yields on two-year debt momentarily dropped to their lowest in the session. Market participants are now expecting about 77 basis points in cuts for the year, an increase from the 73 basis points anticipated prior to the announcement. Despite maintaining the end-of-year rate forecast at 4.625%, unchanged from December, the Fed has signaled potential for higher rates in the future. This adjustment has led to a decline in longer-dated Treasury yields.
The current effective policy rate stands at 5.33%, following the setting of the target band between 5.25% and 5.5% in July, aligning with the Fed's end-of-year median projection and indicating a dovish stance that was more than the market had predicted.
Inflation expectations, as measured by the market, have risen following the Fed's decision. This is partly due to the officials raising their inflation forecast for 2024 to 2.6% from 2.4%, and their growth forecast to 2.1% from 1.4%. Additionally, the unemployment rate projection was slightly reduced to 4% from 4.1%, suggesting a bullish yet hawkish outlook on the economy, with expectations of higher GDP and lower unemployment, alongside concerns about inflation.
Overall, the Federal Reserve's projections and policy directions hint at a strategic balance aimed at achieving a soft landing for the economy, amidst varying economic indicators and market reactions.
