(Bloomberg) -- In one corner of the U.S. rates market, traders have begun to contemplate the possibility of Federal Reserve rate cuts in 2025.
That's what the eurodollar futures market is predicting, as short-term interest-rate traders are pricing in a substantially lower peak for the Fed's policy rate than the central bank expects. In other words, they are saying that the U.S. economy can't cope with the number of rate hikes Fed officials are forecasting.
This is evident in the spread between December 2024 and December 2025 eurodollar futures, which inverted on Wednesday and remained negative Thursday. The inversion means that traders expect the policy rate to peak after just five 25-basis-point rate increases priced in by the end of 2024. The Fed's latest dot-plot forecast anticipates seven rate hikes by the end of 2024 and another three by the end of 2025.
Short-maturity Treasury yields shot higher Thursday, with the 2-year rising as much as eight basis points, in response to comments by several more Fed officials supportive of ending asset purchases sooner than planned. The market priced in a faster pace of Fed rate hikes until the end of 2023, where expectations plateau.
Rate Traders Are Busy Pricing a June Fed Hike in Wake of Powell
This may all change Friday, with November jobs data having something to say about whether the Fed or traders are making the right call on the rate path.
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