NEW YORK – Futures on the Secured Overnight Financing Rate (SOFR) and the Federal funds rate, which measure expectations of Federal Reserve monetary policy moves, on Monday priced in an inter-meeting interest rate cut.
The August 2024 SOFR futures have factored in the likelihood that the Fed will cut interest rates by at least 25 basis points (bps) this month. On the other hand, the September futures have priced in a 100% chance of at least a 50 bps rate reduction.
SOFR, a measure of the cost of borrowing cash overnight, was at 5.35% as of late Friday.
In fed funds futures, the market has priced in 25 bps easing in August. For 2024, futures have priced in about 122 bps of cuts, scaling down from about 140 bps in cuts seen earlier in the session, according to LSEG calculations.
Expectations of an early rate cut by the Fed came after a weaker-than-expected jobs report last Friday that saw a stock meltdown and a plunge in U.S. Treasury yields after substantial safe-haven flows.
Some market participants, however, were skeptical about a rate move before the Fed’s September meeting.
“The Fed is not there to support financial market prices because people are upset with their returns. Their job is to see that markets are functioning properly,” said Jim Caron, chief investment officer, of cross-asset solutions at Morgan Stanley Investment Management.
“When we think about the Fed intervening, the main trigger point is if they believe something wasn’t functioning properly. Unless you see a liquidity market functionality crisis, I don’t see an emergency cut happening.”
The next Fed meeting is on Sept. 17-18.
U.S. Treasury yields were still down midday on Monday but had risen from their lows of the day, helped by a bounce in the U.S. services sector index.
U.S. services sector activity rebounded from a four-year low in July amid a bounce back in new orders and the first increase in employment in six months. The Institute for Supply Management’s (ISM) non-manufacturing purchasing managers (PMI) index increased to 51.4 last month from 48.8 in June, which was the lowest since May 2020.
SOFR and fed funds futures did pare back rate cut expectations after the services sector report.
Also helping the slight retreat in Fed rate cut views were comments from Chicago Fed President Austan Goolsbee, who is not a voter at this year’s Federal Open Market Committee.
On Monday, Goolsbee cautioned against taking too much signal from a global stock market sell-off that accelerated in the wake of fears the U.S. central bank has waited too long to begin cutting interest rates. The impact of the Bank of Japan’s decision last week to raise rates, and increasing geopolitical tensions in the Middle East, have also contributed to the bloodbath in financial markets.
“The law doesn’t say anything about the stock market; it’s about the employment and it’s about price stability,” Goolsbee said, citing the Fed’s dual goals set by Congress, as he noted how prone financial markets are to volatility.
(Source: ReutersReuters)
