Traders Trim Bets on Fed Rate Cuts as Inflation Eases

As inflation has begun to cool, traders have scaled back their expectations for Federal Reserve interest-rate cuts. The market's perceived odds of a 50-point cut have fallen from over 60% earlier this week to around 50% as of Friday, according to the CME FedWatch Tool. This shift in sentiment has led to a rally in large-cap indexes, with the Russell 2000 small-cap index leading the way, up 2.5% on the day and 4.4% for the week.



The Fed's decision to cut rates by 50 basis points on Wednesday was widely expected, but the market's reaction has been mixed. While the Dow Jones Industrial Average and S&P 500 indexes have both gained over 2% for the week, the Nasdaq Composite has lagged, up just 1.5%. This divergence in performance suggests that investors may be taking a more cautious approach to the Fed's rate cut, as the tech-heavy Nasdaq has historically been more sensitive to changes in interest rates.

The Fed's rate cut was intended to bolster a cooling labor market while sustaining inflation's downward drift toward its 2% annual target rate. However, the market's reaction to the cut has been muted, with investors seemingly more focused on the potential impact of the coronavirus outbreak on global economic growth. This suggests that traders may be more concerned about the broader economic outlook than the immediate impact of the Fed's rate cut on financial markets.



In conclusion, the Fed's rate cut has led to a rally in large-cap indexes, with small-cap stocks outperforming. However, the market's reaction has been mixed, with the tech-heavy Nasdaq Composite lagging behind. Investors appear to be more focused on the potential impact of the coronavirus outbreak on global economic growth than the immediate impact of the Fed's rate cut on financial markets. As the situation continues to evolve, traders will likely continue to adjust their expectations for Fed rate cuts and the broader economic outlook.