Yields drop as Fed sticks to 75 bps rates cut forecast for 2024

March 20 (Reuters) – US Treasury yields fell on Wednesday when the Federal Reserve said it still anticipates cutting interest rates three times this year based on its updated economic projections.

“The big takeaway for markets was that the 2024 dot remained at three cuts, and there was bit of increase in the long run dot at 2025,” said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York.

Traders had speculated the Fed could reduce its projections to two cuts this year, which are graphed in the so-called “dot plot,” following stickier-than-expected consumer and producer price inflation in January and February.

Some of the market moves on Wednesday that sent yields briefly higher may have been due to investors covering positions after they had expected the Fed to signal fewer rate cuts this year.

“There were a lot of investors positioning for the dots to move to just two cuts this year and some of those more hawkish expectations have been dashed,” said Goldberg.

Traders are looking for further signals on whether inflation is likely to resume easing, with the increases in January and February blamed at least in part on seasonal factors.

Fed Chair Jerome Powell said in a press conference on Wednesday that despite the recent data, the inflation numbers “haven’t really changed the overall story, which is that of inflation moving down gradually, on a somewhat bumpy road.”

The US jobs market, meanwhile, has remained robust in terms of overall jobs gains, though an uptick in the unemployment rate in February raised some concerns that it is worsening.

Powell said on Wednesday that “the labor market is in good shape,” and that “I don’t see those cracks today” in labor markets.

Benchmark 10-year yields were last at 4.277%, down from around 4.297% before the Fed statement. Two-year yields dropped to 4.621%, down from around 4.677%.

The inversion in the yield curve between two-year and 10-year notes narrowed by five basis points on the day to minus 34 basis points.

Fed funds futures traders are now pricing in a 74% probability that the Fed will begin cutting rates in June, up from 59% on Tuesday, according to the CME Group’s FedWatch Tool.

Powell also said on Wednesday that it is getting closer to slowing the pace of its balance sheet runoff.

That may help boost the US bond market as the US central bank lets fewer maturities roll off its balance sheet without replacement.

(Reporting By Karen Brettell; Editing by Cynthia Osterman)