Traders are increasingly placing their bets on US interest rate cuts following the announcement that Jay Powell will be leaving the Federal Reserve next year. This decision comes amidst a wave of criticism from President Donald Trump, who has accused Powell of being too slow in lowering borrowing costs.
Market expectations now indicate that there could be at least five quarter-point cuts by the end of next year, a significant increase from the four cuts that were anticipated just a month ago. This shift in expectations is attributed to a change in the rate-setters’ views on the inflationary impact of tariffs. Additionally, analysts believe that Trump’s relentless attacks on Powell, labeling him as “Mr. Too Late,” have led to speculations that a more dovish successor will be appointed.
Matthew Raskin, head of US rates research at Deutsche Bank, noted in a recent client communication that the market is increasingly anticipating ongoing easing once a new Fed chair is in place. Trump recently revealed that he has narrowed down his search for Powell’s replacement to “three or four people,” expressing his dissatisfaction with Powell’s performance.
Among the front runners for the position are Treasury secretary Scott Bessent, Kevin Warsh, and Fed governor Christopher Waller. Despite candidates like Warsh having a historically hawkish stance, market experts believe that the current environment might prompt a shift towards a more dovish approach.
The anticipation of a more accommodative Fed chair has led to speculations that the central bank may appoint a “shadow chair” before Powell’s term ends to signal a more dovish stance on rates. However, the White House has stated that a decision on Powell’s replacement is not imminent.
Recent comments from Fed policymakers, including Governor Michelle Bowman, have further fueled expectations of faster rate cuts. Both Bowman and Waller have expressed support for cutting rates as soon as July, citing lower-than-expected inflation figures.
Despite these mounting expectations, Powell has resisted the idea of a July rate cut, citing concerns about inflation risks. During a recent speech in Congress, Powell emphasized that rate cuts would not be considered until the autumn, as the effects of Trump’s tariffs on prices are expected to materialize in June and July.
While consumer price inflation saw a slight uptick in May, reaching a rate of 2.4%, it was lower than economists’ predictions. The two- and five-year Treasury yields, which are sensitive to rate expectations, reached two-month lows this week as investors factor in the possibility of more rate cuts in the near future.
In conclusion, the impending departure of Jay Powell and the speculation surrounding his successor have significantly influenced market expectations for US interest rates. As investors brace for potential rate cuts, all eyes are on the Federal Reserve and its future monetary policy decisions.
