Markets urge the Fed to cut interest rates. Will he listen?

Wall Street traders are increasingly banking on the likelihood of interest rate cuts by the Federal Reserve this year. On Tuesday, President Jerome Powell hinted that US central bank policymakers could react to the recent escalation of China's trade war with China. rates.

US stocks celebrated the news, with the Dow Jones industrial average exceeding 500 points.

Powell, at a conference in Chicago on Tuesday, said the Fed was closely monitoring the impact of global trade developments on the US economy, noting that decision-makers were ready to take the necessary action to support a record-breaking expansion.

"We do not know how or when these problems will be solved," he said. "We are closely following the implications of these developments for the US economic outlook."

The WEC's FedWatch tool, which analyzes the probability of interest rate movements for future Fed meetings, is currently forecasting a 55.9% rate reduction in July, with 49.7% of traders predicting the policy rate Federal funds will increase from 2% to 2.25 percent range. Only 13.6% of traders believe that interest rates will remain in the current range of 2.25% to 2.5% by September.

And last week, when the bond curve reversed – that is, the interest rate yield on 10-month Treasury bills fell below the 10-year Treasury note yield. , a current foreshadowing of an impending recession – the market sent a strong message to the Fed that interest rates were too tight.

"It's a very clear message that the bond market thinks that interest rates are too high," said Tom Essaye, the founder of Sevens Report Research, at FOX Business. "We have not seen this for a decade, probably more. The Fed ignores this, and it has its reason, but if it does not change quickly, it will have to take it into account. The question then becomes: have they waited too long? Are we already headed for trouble?

It's not just Powell who has created a dovish pivot in recent weeks.

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James Bullard, chairman of the US Federal Reserve in St. Louis, said Monday that the central bank could be forced to cut rates due to moderate inflation, a reverse yield curve and a negative yield curve. Persistent uncertainty regarding trade.

US inflation accelerated in April after a weak start to the year, but at 1.5%, it remains well below the Fed's 2% target, which has fueled the Fed's trade talks. rate reduction.

Bullard is a voting member of the FOMC Committee this year.

"A downward adjustment of the key rate could be justified shortly to help refocus inflation and inflation expectations on the objective as well as to provide insurance in the event of a more pronounced slowdown than planned, "he said.

Brian Moynihan, CEO of Bank of America, does not intervene. Despite rumors surrounding an imminent reduction in interest rates, Bank of America is buying nothing. "I do not think they'll do it unless something goes really round in trade, I think the economy is stronger than people think" Moynihan said at the time. a discussion with Maria Bartiromo of FOX Business at the Economic Club of New York on Tuesday.