Federal Reserve Projection Signals Reduced Easing as Treasury Yields Rise

Key evidence

1. Over the past 48 hours, market indicators reflect a shift toward maintaining higher interest rates, with reduced expectations for early easing and a focus on persistent inflation. The data points to a cautious stance by the Federal Reserve and market participants regarding rate cuts and liquidity conditions.
2. The CME FedWatch tool shows the market now prices an 82 basis point cut in 2024, down from 110 basis points a week ago, indicating a decline in easing expectations. The probability of a March rate cut remains near zero at 97%, with markets assigning only a 28% chance of a May cut, down from 50%. The June meeting is now viewed as the first realistic point for a rate reduction, with a 56% probability of a 4.75–5.00% rate.
3. The 2-year Treasury yield has increased by 12 basis points to 4.72%, signaling market expectations of sticky inflation and skepticism about early policy easing. Federal Reserve officials Jefferson and Waller reiterated the stance of no rush to cut rates, emphasizing a restrictive policy until inflation declines further. The Fed’s balance sheet continues to shrink at a steady pace, with a $25 billion reduction to $7.64 trillion, reinforcing the tight monetary stance.