U.S. Fed Swaps Now Show 100 Bps Rate Cut By December: What It Means

The market is buzzing: U.S. Fed swaps are now pricing in a significant shift, indicating a potential 100 basis point (bps) rate cut by December. What\'s driving this dramatic expectation, and what are the potential consequences for the economy and your investments?

The Changing Landscape: From Hawkish to Dovish?

For months, the Federal Reserve has maintained a relatively hawkish stance, fighting inflation through aggressive interest rate hikes. The Fed has since December signalled it expected to cut its key interest rate by the equivalent to three quarter-point cuts, from the current range of 5.25 to 5.5 per cent. However, recent economic data and market reactions suggest a possible pivot. This includes evolving expectations for inflation, labor market conditions, and overall economic growth.

Key Factors Influencing the Shift in Swap Rates

Several factors are contributing to the increased likelihood of a substantial rate cut: “(Reuters) -Major brokerages reiterated their view of a 25-basis-point (bp) interest-rate cut by the U.S. Federal Reserve in December after U.S. consumer prices for" data emerged. Markets now see more than 100 bps of cumulative rate cuts before the end of this year, with the low of the cycle seen near 3.0% (end 2025/early 2025). Despite Friday’s [data], swap rates continue to reflect this anticipation. Furthermore, global economic uncertainty, including potential impacts from tariffs and geopolitical events, adds to the pressure on the Fed. But now with Trump\'s tariffs, they are putting their previous forecast back on the table in expecting Powell & co. to deliver between 75 bps to 100 bps of rate cuts for the [year].

Analysts\' Expectations: A 25 Bps Cut in December and Beyond?

Financial analysts are closely monitoring the situation. “Given softer labor market conditions, strong productivity growth, and moderating inflation trends, we continue to expect a 25 bps (basis points) rate cut by the Fed [in the near future]." While a 25 bps cut in December is largely anticipated, the swap market suggests the possibility of further cuts throughout the following year, possibly influenced by concerns about stimulating growth amidst economic headwinds. The Federal Reserve Open Market Committee released its decision on the federal funds rate earlier today at the December meeting. As expected the Fed Funds rate [remained unchanged, but forward guidance suggests a shift].

Impact on the Economy and Your Investments

A rate cut of this magnitude would have far-reaching consequences. Lower interest rates typically stimulate economic activity by making borrowing cheaper for businesses and consumers. The Federal Reserve continues to make borrowing cheaper, cutting its benchmark interest rate again on Wednesday. The rate was lowered by 25 basis points to a [specific value, if known]. This can lead to increased investment, spending, and job creation. However, it can also fuel inflation if demand outstrips supply. Investors should be prepared for potential volatility in the stock market and adjust their portfolios accordingly. Consider consulting with a financial advisor to develop a strategy that aligns with your risk tolerance and investment goals.