Former president of the Federal Reserve Bank of NY, Bill Dudley, released an opinion piece yesterday AM titled "The Fed Might Be More Dovish Than Powell Thinks." In it, Dudley points out how the Fed aims to move toward a neutral policy, which is supported by belief that r* (the neutral rate) is around 3.00%.
However, he notes that the economy's strong performance contradicts the view that current policy is posing more risk to the labor market than inflation. Further, falling rates and stock market highs have helped ease financial conditions, implying policy tightness has already eased without the cuts. By cutting more, the Fed risks reigniting inflationary pressures, especially if inflation expectations begin to creep higher.
Dudley is often believed to be one of the Fed's avenues to communicate with markets during dark periods. In this piece, he's effectively urging the Fed to push back against market expectations of rapid cuts. Whether or not the Fed is behind the message is to be determined, but it's worth putting on your radar. Feel free to check out the full piece here.
One of my favorite graphs outlines implied y/e 2025 and 2026 rate expectations over time. As seen below, the market certainly has a demonstrated history of getting ahead of itself, and by being overly optimistic on the rate/number of cuts, the Fed can actually end up needing to cut slower.
The current expectation is for roughly five more 0.25% cuts between now and y/e 2026.
If you agree with Dudley, hedges against rising rates are currently on sale. Locking in a swap or purchasing an in-the-money cap could prove to be beneficial, since we'd be pricing when the market anticipated deeper/more rapid cuts.
If the Fed is looking to leverage Dudley and/or delivers a hawkish cut at next week's meeting, the market could move to back cuts out and push hedging costs higher.