The market’s stubborn hopes of a first cut to US interest rates in March were finally crushed over the past week by strong economic data and firm messaging from Jay Powell, chair of the Federal Reserve. Beyond next month, however, traders have a different outlook for the Fed’s monetary policy than officials inside the US central bank. The divergence sets the stage for volatility and potential losses if the Fed sticks with its plans.
More swings like that may be in store if the market is forced to adjust to the Fed’s view. After hitting a four-month low in January, the ICE BofA Move index, which maps expectations of volatility in the Treasury market, has ticked up in February as rate expectations have changed. US stocks, meanwhile, rose to all-time highs on Friday after the strong jobs report, before dipping on Monday. But anticipation of more cuts than the Fed is expecting could also be bolstering prices.
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