Markets Bet on Rate Cuts After Powell’s Tenure
Federal Reserve’s Future Under Scrutiny
Traders are increasingly anticipating interest rate reductions in the U.S. following **Jay Powell**’s departure as Federal Reserve chair. This shift comes amidst criticism from **Donald Trump**, who believes borrowing costs should be lower.
Traders are now pricing in at least five quarter-point cuts by the year’s end, according to futures markets. This is up from previous expectations a month ago. The change in sentiment stems from rate-setters adjusting their views on inflation and the former president’s ongoing criticisms of **Powell**.
“The more notable shift over the past month is in cuts priced for the middle of next year, as the market seems to increasingly anticipate ongoing easing once the next Fed chair is in place,”
—**Matthew Raskin**, Head of US Rates Research at Deutsche Bank
In a recent post on Truth Social, **Trump** stated he had narrowed his search for **Powell**’s replacement to “three or four people”. He added, “I mean [**Powell**] goes out pretty soon, fortunately, because I think he’s terrible.”
Potential Replacements and Market Expectations
The Treasury secretary, **Scott Bessent**, and **Kevin Warsh**, who served as a Fed governor during the 2008 financial crisis, are seen as frontrunners for the position. Also under consideration is Fed governor **Christopher Waller**, who has supported a rate cut as early as July.
The consensus among market analysts is that **Powell**’s replacement will likely be more inclined toward lowering rates. However, analysts such as **Ian Lyngen**, head of US rates strategy at BMO Capital Markets, have suggested that prior stances may not accurately predict future actions.
The two- and five-year Treasury yields decreased this week, indicating higher expectations for cuts in the medium-term. These yields are very sensitive to rate expectations. The anticipation of rate cuts is also fueled by comments from Fed policymakers, like Governor **Michelle Bowman**, who favors rate cuts by July, citing decreased inflation.
According to the Bureau of Labor Statistics, the Consumer Price Index rose 3.3% for the twelve months ending May 2024. This is a slight decrease compared to the 3.4% increase for the period ending April. (BLS)
The White House has signaled that a decision on **Powell**’s successor is not “imminent.” **Powell** has resisted demands for rate cuts due to inflation concerns and stated that reductions are off the table until autumn.
