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USD Interest Rates Commentary

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Interest Rate Market Snapshot
  Federal Funds SOFR 2Y Treasury 5Y Treasury 7Y Treasury 10Y Treasury
  4.33% 4.29% 3.93% 3.96% 4.07% 4.18%
Source: Bloomberg The Fed tip toes around Trump to hold rates
  • No rate cut today. The Fed decided to keep the Federal Funds target range steady at 4.25%-4.50%, keeping SOFR in the 4.30%-4.35% range

    • The decision was nearly unanimous (11-1), in line with market expectations and largely a given

  • The statement changed very little, but one key line was: “Uncertainty around the economic outlook has increased”

    • The January statement included this line, but the fact they purposefully amended it to add “increased” is a subtle nod to the uncertainty tariffs have stirred up

  • The updated forecasts on rates, inflation, unemployment, and growth offered some insights on how the Fed plans to navigate these uncertainties:

    • In short, they essentially outlined a stagflation scenario, but Powell held short of saying it out loud

    • This year: higher inflation, higher unemployment, and lower growth

    • If so, maybe 2 cuts, but that’s a coin flip. 9 members seem supportive of that view, 8 anticipate fewer cuts to happen. Powell emphasized how uncertain the outlook is

  • Lastly, the shrinking of their balance sheet is coming to an end next month. Marking the end of a nearly 3-year effort to normalize liquidity post-COVID

image-20250320093948-1

The Takeaway: Today felt more like an effort to redefine why interest rate cuts might happen rather than to commit to when they’ll happen. Previously, cuts were seen as a natural response to inflation progressing toward 2%, but with tariffs in the mix, that scenario is nearly off the table. Now, cuts will likely come only as a reaction to slower growth or rising unemployment—ironically, due to those same tariffs. The mood has shifted: rate cuts were once seen as a cause for celebration, but now they signal trouble, arriving only if the economy falters

 

Powell actually said the t-word again

image-20250320094037-2

“We’re at a place where we can cut, or we can hold”

 

Market Reaction

  • Lower fixed rates – take advantage of them

  • The Fed’s announcement that it will resume buying Treasuries provided a boost, but it was Powell’s “transitory” Freudian slip that truly fueled the market, driving rates significantly lower this afternoon

  • 2 and 3-Year Fixed: It edged higher over the past week but quickly reversed on Powell’s tone. After starting the Fed meeting up 5 basis points on the day, it ended 7 basis points lower—a solid ~12 basis point round trip. Markets are now back to pricing in three rate cuts over the next 12 months

image-20250320094116-3

sOURCE: BLOOMBERG

Take advantage of those priced-in rate cuts—3-Year fixed SOFR rates just got cheaper

  • Markets are quick to price in rate cuts, expecting the Fed to swoop in at the first sign of rising unemployment or slowing growth. But with sticky inflation—and new inflationary pressures from tariffs—the Fed may stay on the sidelines longer than markets anticipate

  • Right now, the market has 3+ rate cuts priced into the next year of Fed meetings

image-20250320094147-4

SOURCE: BLOOMBERG
  • As a borrower, do you:

  • Float at 4.35% and hope those cuts materialize?

  • Or fix SOFR today at 3.60%-3.70% and lock in those cuts upfront?

    • With 3-year swap rates where they are, don’t hesitate to work an open order 10-15 basis points below today’s close—the market may give you the chance

  • And…don’t be afraid to short caps in this environment

    • Powell plainly stated today: “We’re at a place where we can cut, or we can hold”

    • Use that to your advantage and put that option premium to work with your swap strategy

image-20250320094218-5

SOURCE: BLOOMBERG

Related tags: Interest Rates

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