The United States and China agreed to lower tariff rates by 115 percentage points each over 90 days, leading the market to assess that further interest rate cuts by the Federal Reserve (Fed) will be delayed compared to earlier expectations.
On the 12th (local time), according to the Chicago Mercantile Exchange (CME) FedWatch Tool, participants in the U.S. federal funds rate (FF) futures market reflected a 37.2% probability of a two-rate cut by the end of the year, an increase of 7.3 percentage points from the previous day. The probability of a single rate cut also rose from 11.1% to 19.8%. Conversely, the probability of a cut of three times or more dropped from 57.5% to 39.2%, a decline of 18.3 percentage points.
Market participants noted that until the day before, the probability of an additional interest rate cut at the Federal Open Market Committee (FOMC) regular meeting in July was seen at 60%, but on this day, they projected 60% for a freeze instead. In contrast, the likelihood of an interest rate cut occurring at the September FOMC regular meeting was reflected at 79.5%.
The Federal Reserve froze the interest rate at 4.25% to 4.5% following the results of the May FOMC regular meeting. Jerome Powell, the Fed Chair, said, "Uncertainty about economic outlook has increased further," noting that he would wait for inflation and employment-related crises to be reflected in the data.
Based on this stance from the Fed, the market had initially anticipated three interest rate cuts to occur within the year starting in July. However, as concerns that tariffs would stimulate inflation somewhat eased following the U.S.-China negotiations, the expected timing and frequency of the Fed's interest rate cuts also changed. The yield on the 10-year Government Bonds, which serve as a benchmark for global bonds, surpassed the 4.4% mark during the day.