December rate cut in doubt? Rare division within the Federal Reserve for the first time in six years, "Bond King" Gross goes short on U.S. Treasuries!

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With Chairman Powell’s hawkish remarks and the rare public display of division within the Federal Reserve, market uncertainty has sharply increased—even the “Bond King” Bill Gross has begun shorting U.S. Treasuries.

On Thursday, WallstreetCN mentioned that after this week’s Fed rate meeting, Chairman Powell stated that a rate cut in December is far from “set in stone.” Moreover, in this rate decision, some officials advocated for a larger rate cut while others preferred to hold steady.

This is the first time in six years that such a complex internal disagreement has occurred. According to the CME FedWatch Tool, the probability of a Fed rate cut in December has dropped from 91.7% one week ago to 63%.

(CME FedWatch Tool showing the probability of a Fed rate cut in December)

With the Fed’s policy path no longer clear, PIMCO co-founder and legendary investor Bill Gross revealed that he is selling U.S. Treasury futures, betting that high deficits and excess Treasury issuance will continue to drive yields higher.

First Dual Dissent in Six Years—Fed Consensus Broken

The increasingly public split within the Fed is becoming a new focus for markets. In his speech, Chairman Powell acknowledged “strongly differing views” within the FOMC.

In this week’s rate decision, two of the twelve voting members dissented. Governor Milan advocated a 50-basis-point cut, while Kansas City Fed President Jeff Schmid believed rates should remain unchanged.

On Friday, WallstreetCN mentioned that Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Kansas City Fed President Jeff Schmid each explained their preference for keeping rates unchanged.

Jeff Schmid believes the labor market is basically balanced, while inflation “remains too high.” Logan said that unless there is clear evidence inflation is slowing faster than expected, it would be “difficult for her to support another rate cut in December.”

However, Fed Governor Waller spoke up, continuing to support a rate cut in December, reasoning that the “biggest worry is the labor market,” and that the inflation data are moving in the right direction.

This rare dual dissent is the first appearance in six years. Some market participants believe that such division may persist if future economic data are mixed. Bob Michele of JPMorgan said:

If future U.S. economic data are mixed, you’ll see more dissenting voices. Powell is losing control over Fed members. Look at him—he’s basically entered the ‘lame duck’ phase of his term.

“Bond King” Makes a Move, Shorts Ten-Year U.S. Treasury Futures

Amid rising uncertainty over the Fed’s policy path, the former “Bond King” Bill Gross has opted to sell U.S. Treasury futures.

According to reports, the Pimco co-founder remains bearish on U.S. Treasuries. Gross had previously warned about the risk of overexpansion in the U.S. financial system.

Now, he says that the continuously expanding deficit and a weakening dollar make him pessimistic about U.S. Treasuries. Gross wrote in an email:

A trade? I am selling 10-year (Treasury) futures. Even if economic growth slows to 1% to 2%, (Treasury) supply is still too high.

Analysts believe that in the current environment, the trades most sensitive to short-term rate changes are no longer cheap. Investors need to adjust their strategies and shift towards longer-duration bonds, which are less affected by short-term policy volatility. Dan Fuss of Loomis Sayles advises investors to remain cautious:

You don’t want to stand in traffic—you want to go to the median strip.

Persistently high U.S. Treasury yields have provided support for the dollar index, as this makes holding dollar cash more attractive for global investors. Jim Caron of Morgan Stanley said in an interview:

If you expect the Fed not to cut rates so soon or so much, that should support the dollar.

According to reports, Morgan Stanley’s FX team, which had long been bearish on the dollar, changed its view to neutral after the Fed’s October meeting and advised unwinding short positions on the euro and yen.

Daniel Von Ahlen and Andrea Cicione of TS Lombard are betting that U.S. short-term rates will exceed Japan’s by year-end. Their trading strategy is to short December U.S. Secured Overnight Financing Rate (SOFR) futures, while going long on the Japanese equivalents.

Risk Warning and DisclaimerThe market has risks; investment requires caution. This article does not constitute personal investment advice, nor does it take into account any individual user’s specific investment objectives, financial situation, or needs. Users should consider whether any opinions, perspectives, or conclusions in this article are suitable for their particular circumstances. Investing based on this article is at your own risk. ```