Fed Rate Cuts Fully Priced In: Market Anticipates Three Cuts Amidst Uncertainties

The market has fully priced in the expectation of three interest rate cuts by the Federal Reserve this year, according to analysts. This comes as the central bank faces a challenging trade environment and economic uncertainties. While the Fed has not yet shown increased dovishness, St. Louis Fed President Bullard recently highlighted some downside risks to the economy, opening the door for potential rate cuts.

The market's expectations for Fed easing have increased significantly in recent weeks, with the probability of a rate cut at the May meeting now exceeding 50%. This shift in expectations has led to a drop in terminal rates by about 50 basis points at the further end of the curve. Despite the low possibility of a rate cut at the upcoming March meeting, the market's anticipation of Fed easing continues to grow.

Analysts suggest that the Fed is likely to maintain a "wait-and-see" approach, focusing on achieving a 2% inflation rate before considering any rate cuts. However, the market has already priced in the expectation of three rate cuts this year, reflecting investors' confidence in the Fed's ability to support the economy amidst global uncertainties.