Once again, the Federal Reserve (Fed) and the markets are at odds with each other. The Fed announced it would keep rates unchanged at the conclusion of its most recent policy meeting on May 1, and Fed Chair Jerome Powell delivered comments that mirrored what he’s said for the past few months.
Still, bond markets are staunchly positioned for a lower fed funds rate, even as economic data have shown signs of recovery. Fed fund futures are pricing in more than a 50% chance of a rate cut in 2019, and short-term yields have dropped below the upper-bound fed funds rate for the first time this cycle. While investors are literally buying into this possibility, we see the Fed’s continued pause as the most prudent approach [Figure 1].