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NEW YORK, July 31 (Reuters) - U.S. short-term interest rates futures tumbled on Wednesday as Federal Reserve chief Jerome Powell curbed expectations the central bank started a protracted a rate-easing cycle after it embarked on its first rate cut in a decade.
Powell, speaking in a news conference after the release of the Fed statement, characterized Wednesday’s 25 basis-point rate decrease as “a mid-cycle adjustment to policy,” which traders interpreted as meaning the Fed is not ready to deliver a steady stream of cuts.
Powell’s description stoked a sharp sell-off in rate futures and 2-year Treasury yields to a two-month peak.
They recovered later after Powell attempted to clarify his view by saying the Fed is open to lowering rates more than once.
“Overall, the rates market interpreted Chair Powell’s press conference as sending a muddled and confusing message on the outlook for the fed funds target rate and one that disappointed market participants hoping for a more clearly dovish signal,” Bank of America Merrill Lynch analysts wrote in a research note.
In U.S. trading, federal funds futures implied traders see about a 56% chance the U.S. central bank would lower key lending rates to 1.75%-2.00% at its Sept. 17-18 policy meeting, down from a 67% likelihood late on Tuesday, CME Group’s FedWatch program showed.
That view on Fed’s next possible cut was below an implied 83% probability shortly after the Fed announced its first rate decrease in a decade.
The fed funds complex suggested traders slashed their outlook on further rate decreases next year. They now positioned for only 30% chance the Fed would reduce the target range on policy rates to 1.50-1.75% or lower by April 2020, down from 72.5% late on Tuesday.
“The market will need clearer signals from the Fed before it can believe the Fed will truly act to re-calibrate policy to a more accommodative stance,” the Bank of America Merrill Lynch analysts said.
Reporting by Richard Leong Editing by Tom Brown and Jonathan Oatis