Markets prepared for Fed cuts
While there was uncertainty prior to the FOMC’s September meeting as to how much the Fed would initially cut rates, bond markets appeared to be pricing in the 0.50% rate cut that eventually occurred. “In recent months, bond yields have fallen far and fast,” says Haworth. “In April, the 2-year Treasury bill was at 5%. Now it is down to 3.6%.” Similarly, the 1-month Treasury bill, the closest comparison to the fed funds rate, fell from 5.55% on August 8, 2024, to 5.05% on the day prior to the Fed’s rate cut announcement, and then on the day of the Fed’s announcement, it fell below 5%.4
Strong 2024 equity market performance, particularly recent gains in sectors with interest rate sensitivity, such as real estate and utilities, also reflected the market’s expectation of pending rate cuts.
How much will the Fed cut rates?
At the September FOMC meeting, members laid out their projections for future fed funds rate cuts. Currently, they project another 0.50% of cuts in 2024 and 1.00% of additional cuts over the course of 2025. That could happen with 0.25% cuts at the November and December FOMC meetings and cuts at every other meeting in 2025.
The CME FedWatch Tool, which analyzes the probabilities of fed fund rate changes based on interest rate trader actions, indicates a high likelihood of a 0.25% rate cut at the FOMC’s November meeting. A smaller number of traders project a November rate cut of 0.50%.5