Traders eye Fed rate cuts even as job market stays hot

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(Reuters) – A government report Friday showing the U.S. labor market is still running strong appeared to ratify the Federal Reserve’s decision this week to tighten monetary policy, but traders continued to bet the central bank’s next move will be an interest-rate cut.

The Fed raised its benchmark rate on Wednesday for what it signaled could be the last time before an extended pause to allow time for its rate hikes to wring high inflation from the economy.

Traders had been betting that process would be relatively quick, allowing the Fed to reverse course and start easing the policy rate, now in the 5.00%-5.25%, as early as September.

Friday’s Labor Department report showing employers added 253,000 jobs last month and the unemployment rate fell to 3.4% put those expectations in doubt.

“The Fed still has some work to do and the job market’s hot,” said Ameriprise FInancial’s chief market strategist Anthony Saglimbene. “I just don’t see an environment where the Fed is cutting interest rates later this year.”

And yet that is what traders continue to see – or at least, to hedge strongly against. After the report they did put in a small probability of a rate hike in June, CME’s FedWatch tool shows. But by far the bigger bet is for the Fed to stand pat next month, and overall traders left bets on a September start to rate cuts intact.

By December the Fed will have dropped its benchmark rate to about 4.2%, interest-rate futures prices suggest.

(This story has been corrected to fix the figure to 4.2%, not 5.2%, in paragraph 7)

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