The FED has chosen to "hit hard" with a 50-basis points rate cut, bringing the federal funds target range to between 4.75% and 5%. This cut ends the pause that the FED implemented since July 2023 when it stopped aggressively hiking rates. In the meantime, the U.S. unemployment rate rose from 3.5% to 4.2%, and inflation decreased, falling from 3.2% to 2.5%. 

The FED opted for a more dramatic first cut than the traditional 0.25%, at the risk of appearing regretful for delaying the rate cuts and "panicking" after the latest employment figures showed a significant slowdown in job creation. However, this 0.50% rate cut has not led to a decrease in long-term rates. On the contrary, long-term swap rates have risen over the past two days :

What are the reasons for this apparent contradiction ?

• Anticipated Short-Term Rate Cuts:  Expected rate cuts are already factored into long-term rates before they materialize, this was only a slight surprise. The market was split between a 0.25% and a 0.50% cut, but short-term rates leaned more towards the 0.50% scenario, making it slightly more as expected than an actual surprise.

• Raising the "Neutral Rate": The Federal Reserve has once again raised its definition of the "neutral rate," the fourth increase since early 2023.This suggests that the FED is giving credit to economic theories that highlight a more inflationary future growth due to higher fiscal deficits, de-globalization, population aging putting pressure on wage costs, and the energy transition temporarily increasing energy costs. This "neutral" rate, which ensures long-term equilibrium between growth, employment, and price stability, has gradually increased from 2.5% at the start of 2023 to 2.90% today.

• Anticipated Federal Funds Rates: The anticipated federal funds rates are already at 2.75% for the spring of 2026, which remains an optimistic scenario even after the 0.50% cut on September 18, 2024.The credibility of central banks in their fight against inflation has helped contain the rise in long-term swap rates and caused an historic inversion of the yield curve. Conversely, the realization of this short-term rate cut will not necessarily accome with a decrease in long-term swap rates. For long-term rates to fall, anticipations must change, not just be realized.

Recent history teaches us how external shocks can disrupt an established scenario, in either direction. Fixing rates today means crystallizing current expectations of a fall in short-term rates, and this is not necessarily a bad choice.