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Recent sharp declines and increasing volatility in financial markets have prompted a search for direction among investors. Expectations regarding potential interventions from the Federal Reserve (Fed) are gaining momentum with each market downturn. In this atmosphere, a notable weakening of risk appetite can be seen across a broad spectrum, from stocks to cryptocurrencies. Concurrently, strategic changes in U.S. Treasury policies are becoming a topic of discussion for upcoming borrowing processes.
Heightened Expectations for Fed Support
Investors, drawing from experiences of past crises, believe that the Fed may enact a support policy similar to previous instances. The interest rate cuts implemented in 2008 and 2020, along with liquidity injections and bond-buying programs, remain fresh in the minds of investors. Consequently, the notion that similar measures will be introduced in the current context reinforces the risk-averse tendencies in the markets.
Data supports these expectations. Strong signals indicate that the U.S. interest rate market may see five rate cuts by 2025. The potential for a 25-basis-point cut at the Fed’s meeting in May has emerged, with discussions about reducing interest rates to a range of 3.00 to 3.25 percent by year-end. This scenario continues to influence risk perceptions in the markets.
Debates on Treasury Policy Shifts
The U.S. Treasury Department aims to minimize borrowing costs by leveraging falling yields. The refinancing of trillions of dollars in public debt is being pursued, particularly through the effective use of short-term borrowing instruments. Although this approach provides liquidity in the short term, it carries cost and risk factors for the long run.
During the tenure of former Treasury Secretary Janet Yellen, a strategic shift was initiated to reduce the share of long-term bonds and focus on short-term Treasury bills. Since 2023, approximately two-thirds of the federal budget deficit has been financed using this method. However, experts warn that short-term borrowing could create pressure during the restructuring process.
Amid uncertainties in the economic outlook and expectations for interest rate cuts, both investors and policymakers are adopting a more cautious approach. Sales pressure is evident across nearly all financial markets, from stocks to the cryptocurrency sector, as the U.S.’s borrowing plans face a new test. This complex scenario engages not only economic management but also global investors keenly.
