- Traders are increasingly pinning their hopes on an emergency Federal Reserve rate cut.
- At one point on Monday, they were assigning a 60% chance to a rate cut in the next week, according to Bloomberg.
- The Fed rarely cuts rates outside scheduled meetings, with its last emergency move prompted by the pandemic.
Wall Street has been so suddenly gripped by fears of recession that talks of an emergency rate cut are gathering steam.
At one point on Monday, the swap market was pricing in a 60% chance of an emergency 25-basis-point rate cut within the next week, according to Bloomberg.
The sudden shift in sentiment could be seen in the US bond market, with US Treasury yields — which are tied to interest-rate expectations — dropping to their lowest level in a year. The yield on the 2-year Treasury note plunged as much as 16 basis points on Monday, while the yield on the 10-year Treasury note dropped as much as 10 basis points.
Investors are in risk-off mode after an unexpectedly weak jobs report on Friday. Payroll growth slowed more than expected last month while the unemployment rate surged. That triggered the Sahm Rule, a highly accurate recession indicator that flashes when the three-month moving average of the unemployment rate surpasses a key threshold.
But doing this would probably make the carry trade unwind a lot more violent. It would have no immediate effect on the actual economy and instead just melt down the dollar/yen trade and send Japan into a full spiral. And it would also spook the market. Unexpected rate cuts mean FOMC is scared and trying to massively correct their mistakes. Won’t be good optics for the market.
h/t reddit509th