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Traders have started to place significant bets on the Federal Reserve cutting interest rates once more in December, marking the second such adjustment in recent months. According to the latest reading from Fed funds futures contracts, there is now a roughly 75% probability that the U.S. central bank will lower rates in the final meeting of 2023. Markets are preparing for the central bank to pause afterward, with a strong likelihood that it skips making any changes in the January meeting.
This expectation comes amid persistently high inflation levels, which have forced the Fed to engage in aggressive rate hikes throughout the year followed by cautious cuts more recently. Lowering interest rates is typically a response to economic slowdown, and traders appear to believe that softening conditions such as weaker labor markets or lower consumer spending growth are aligning with sustained inflationary pressures. The potential December rate cut signifies that the Fed may be looking to balance the need for continued economic stimulus while concurrently trying to reign in inflation, without unsettling broader macroeconomic recovery.
Stock market reaction to these developments has been relatively muted for now, although volatility could increase as more concrete confirmation of these moves emerges in future economic data releases. Historically, rate cuts can provide upward momentum for equities, particularly if market participants believe it will enhance liquidity and capital access. For instance, the S&P 500 ($SPX) could benefit from another Fed cut as lower borrowing costs often boost profits for companies by reducing their debt servicing expenses. On the other hand, the bond market has seen yields on U.S. Treasury notes ($US10Y) fluctuating as traders weigh the potential impact of lower policy rates on future inflation and long-term interest rates.
In the crypto market, speculative assets like Bitcoin ($BTC) could see renewed investor interest as the prospect of lower rates reduces the opportunity cost of holding non-interest-bearing assets. This shift in sentiment could push capital away from traditional fixed income instruments into riskier assets like cryptocurrencies, although the degree of market reaction will largely depend on investor confidence in upcoming Fed decisions and the global economic landscape. This growing probability of further rate cuts demonstrates the central bank’s ongoing balancing act to maintain price stability while preventing an undue slowdown in economic activity.
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