Fed: Trading a prolonged hold – TD Securities

TD Securities’ US Rates Strategist Molly Brooks (McGown) argues that with the Federal Reserve likely to keep policy on hold for longer, market uncertainty shifts to the timing and number of future rate cuts. She notes that markets now price modest cuts for March and April 2026 and sees scope to fade a further rise in April cut expectations.

Markets grapple with extended Fed pause

"In recent years markets have typically gone into FOMC meetings priced correctly for the action the Fed delivered. Since 2025, markets have at most mispriced Fed action by just 2bp. For meetings where the Fed held rates steady, the average discrepancy was only 0.6bp in the past 5 years."

"With the Fed likely on hold for longer, this leaves the timing and number of cuts priced into the cycle more uncertain. The terminal rate has remained around 3.1% since mid-2025."

"Since the initial cuts began in 2024, Fed holds have led markets to price out cuts in the following meeting rather than pushing out. However, pricing for future meetings was less consistent."

"Given their caution about using forward guidance, the Fed has struggled to deliver dovish holds. Following FOMC decisions, meetings with higher odds of a cut tended to show larger repricing."

"Following Jan NFP data, markets are now pricing in 2bp of cuts in March and 5bp in April. With over a month until the March meeting and more data ahead, a further increase in April cut odds could be an attractive place to fade market pricing."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)