RE:Feds concerned with cutting rates too soon: I just wrote a recent post on this topic and what the bond market is telling us. Here it is again.
What is the bond market telling us? The futures Fed Funds market tells us one thing and the bond market is telling us something else.
Fed funds =~ 5.33%
The 3 month t-bill is =~ 5.384%
The 6 month t-bill is 5.331%
1 year t-bill is =~ 4.95%
Under normal conditions, there is term premia that is the compensation that an investor should receive for taking on duration risk. The term premia between t bills and Fed Funds is negligible and increases only as you move further towards the long end of the yield curve.
It's worth noting that the 3 month t-bill is slightly above the Fed Funds rate. The 3 month t-bill is telling us there are no rate cuts over the next 3 months with a very narrow possibility of a rate hike. These numbers change on a daily basis.
Next, notice that the 6 month t-bill is effectively the same as the Fed Funds. This does not support the idea of a rate cut anytime soon. If rate cuts were to happen with 100% probability, then the 6 month t-bill should reflect that with a lower 6 month t-bill rate.
Finally, the 1 year t-bill rate is only 38 bps below the Fed funds which tells me we may only see 2 rate cuts over the next 12 months. This may be a combination of one rate hike followed by 3 rate cuts, or a long pause followed by only 2 rate cuts.
What is the Fed Funds Futures telling us?
According to the Cme group, the next rate cut will occur on June 12 with a 54% probability. By Dec 18, we should expect 100 basis points of cuts with a 32.6% probability. According to the futures market, they are signalling for more interest rate cuts than the bond market.
Then there's Jay Powell telling us only 3 rate cuts.