As-of yesterday, the short-term interest rate market was pricing a 59% chance of a rate cut at the FOMC’s July meeting, a 75% chance of two cuts by December, and a 53% chance of three cuts by December. As a result, interest rate contracts and short-term bonds have exploded higher in price with two year yields down over half a percent in a bit less than two months. The explicit bet is that the FOMC will be forced to cut rates in response to rising uncertainty related to trade tensions and a weakening global economy, combined with risks of outright recession. In recent commentary, FOMC members have been much less sure about the negative sides of the outlook. One member of the FOMC (St. Louis Fed President James Bullard, the most dovish member of the committee and a regional bank President who has a history of outlandish lurches in commentary) has said verbatim that a cut may be warranted, but no other FOMC member has said anything close to that. Today, Fed Chair Powell said the FOMC will “act as appropriate to sustain the expansion” and is “closely monitoring” how trade developments impact the economy; that’s a long way from getting markets ready for an imminent cut! So the market is clearly being much more aggressive than the Fed. Why?

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