Fed seen pivoting to interest rate cuts in March, perhaps earlier

(Reuters) – The Federal Reserve’s signal on Wednesday that its interest rate hiking campaign is over triggered a drop in bond yields and a rash of market bets on U.S. rate cuts next year, marking a sharp shift in pricing that is rare outside of financial panics.

Economic data on Thursday showing stronger-than-expected retail sales in November and a smaller-than-anticipated rise in weekly jobless claims had traders paring a bit of their earlier enthusiasm for Fed policy easing next year.

But even after the data, rate futures markets remain solidly priced for a March start to a round of rate reductions that would push the Fed’s benchmark rate, now in the 5.25%-5.50% range, to the 3.75%-4.00% range by the end of next year.

That’s twice the 75-basis-points of rate cuts Fed policymakers themselves penciled in for 2024 in projections released by the U.S. central bank on Wednesday.

But to some analysts, the abrupt market moves – with bond yields plunging and stock prices soaring – following the central bank’s policy meeting this week and Fed Chair Jerome Powell’s acknowledgement that rate-cut discussions were coming into view were not necessarily overdone – or even outside of what the Fed itself may be aiming for.

“The Fed is moving aggressively to ease financial conditions,” analysts at Citi wrote. “Chair Powell and his colleagues’ objective is to prevent a gathering slowdown from developing into a recession.”

“Once the market thinks the Fed is done, bonds and stocks BOTH rally, regardless if a recession is ahead or not,” Piper Sandler analysts wrote.

The yield on the 10-year Treasury note fell below 4% for the first time in four months, nearly fully reversing the rise that followed what now appears to have been the Fed’s final rate hike, in July.

Fed policymakers had cited that increase and other tightening of financial conditions as one reason why they could hold policy steady.

(Reporting by Ann Saphir; Editing by Paul Simao)