Waiting on the Fed

With the Nasdaq 100 in bear market territory and current discussions about a potential recesision in the US, perhaps even stagflation, there is one important agent in this developing story that hasn’t pronounced itself: The Fed. According to Fed funds futures, the probability of a rate cut in the next meeting on May 7th is 30%, which means that, despite last week market drama, the Fed will not cut rates, at least not yet. On the other hand, the 2 year Treasury Yield (see chart below) considered the best indicator/ predictor of Fed funds rate, is currently printing a yield of 3.64%, or 73bps below the mid point of the overnight rate. That basically means, the bond market thinks the Fed should cut 75 bps ASAP. Over the following weeks, we will likely see several voting members of the FOMC give speeches to set the tone for the May meeting, which is becoming increasingly important for the market. If they finally fold and act, the equity market will likely stop the bleeding. If the situation deteriorates further, we might even see an inter meeting cut, but for that to happen, things really need to get ugly.

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