Traders Adjust Fed Policy Expectations
Traders in U.S. futures and options markets are reassessing the future path of Federal Reserve monetary policy. The SOFR futures curve has steepened into inversion, signaling that traders now expect a longer period of accommodative monetary policy.
Previously, the market broadly anticipated the Fed would cut interest rates twice by 25 basis points each before returning to a hiking cycle in 2027. However, recent debates over AI's potential impact on the job market have prompted traders to reconsider the relationship between inflation and interest rates.
Potential Inflation Impact from AI
Jack McIntyre, portfolio manager at Brandywine Global, highlighted that the key question centers on whether AI could trigger inflationary pressures. He noted that data center construction and its associated energy demand may represent the primary inflation risks linked to AI advancements.
Weak Confidence in Treasury Allocation
In the cash market, investor confidence in U.S. Treasury allocation has waned. According to JPMorgan's latest client survey covering the week through February 23, neutral positioning in Treasuries hit the highest level since the end of 2024.