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### Market Expectations for Federal Reserve Interest Rate Cuts

(Bloomberg) — Investors indicate expectations for two interest rate cuts by the Federal Reserve in 2024, starting in September, following a surge in inflation that pushed Treasury yields to their highest levels since 2024.

### Shift in Market Sentiment

At the beginning of the year, the consensus was for six rate cuts totaling 1.5 percentage points, with the first cut expected in March. However, current swap contracts suggest a more modest decline in rates, with the year-end rate projected to be only 40 basis points lower than the current level of 5.33%. Options traders are betting on just one rate cut, prompting Wall Street banks to revise their forecasts accordingly.

### Impact on Yields

Yields across different maturities have increased, with the two-year note up by nearly 23 basis points to 4.97% and the 10-year note surpassing 4.5% for the first time since November. The unexpected rise in US inflation, combined with robust job creation numbers, has led to a shift in market expectations regarding Fed rate cuts.

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### Revised Market Forecasts

Economists at Goldman Sachs Group Inc. and Barclays Plc have adjusted their rate cut predictions, with former US Treasury Secretary Lawrence Summers suggesting the possibility of a rate hike. The market consensus now points towards one or two rate cuts at most this year, emphasizing the need for patience on the part of the Fed.

### Outlook on Treasury Yields

The recent surge in Treasury yields, particularly on the 10-year note, indicates a shift in market sentiment towards higher rates. The potential range for the 10-year yield is projected to be between 4.5% and 4.75%, contingent on inflation hovering around 3%.

### Federal Reserve Policy

While Fed policymakers acknowledge the likelihood of rate cuts in the future, they emphasize the importance of ensuring sustainable inflation levels before implementing any changes. Market participants are closely monitoring inflation trends and economic developments to assess the Fed’s future policy decisions.

### Impact on Treasury Auctions

Weak demand was evident in the recent Treasury auction of 10-year notes, where yields exceeded trading levels, signaling investor caution. The release of minutes from the Fed’s March meeting reinforced expectations of a steady rate outlook, maintaining upward pressure on yields in the short term.

### Continued Market Dynamics

The ongoing trend of higher yields reflects concerns about sustained inflation levels and economic resilience. Despite potential opportunities for adding duration at attractive levels, market participants remain vigilant about the impact of inflation and economic performance on future Fed actions.

### Acknowledgement

With contributions from Edward Bolingbroke, Kristine Aquino, Nazmul Ahasan, and Carter Johnson, the market continues to navigate uncertainties surrounding inflation, interest rates, and economic resilience in 2024.

### Insights from Bloomberg Businessweek

2024 Bloomberg L.P.

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