Markets are pricing in a 50 bp cut by the Fed at their next meeting which would take the Fed funds target rate to 0.5%. Funds have bee trading at or below those levels for weeks, so the impact of any official rate cut should be minimal. This explains why the Fed has embarked on a course of quantitative ease, essentially buying bonds from the market and leaving the money sloshing around in the system.
Bond yields continue to slide in anticipation of further bond buying from the Fed in addition to the hundreds of billions announced last week. A two-year Treasury note yields only 0.93% while a 10-year note is solidly under 3%, now at 2.82%. Counter-intuitively, this is dollar supportive as currencies tend to strengthen amid deflation and weaken during bouts of inflation, if recent history is any guide.
