2 hrs ago
Markets Expect Fed Rate Hike Despite Surprise Risks
Investors think the Federal Reserve will probably raise interest rates on Wednesday.
They expect the increase to be one-quarter of a percentage point.
Markets give this decision about a 94% chance of happening.
Similar market expectations have been followed by a rate hike every time in data going back to 2008.
Expectations grew after new data showed that inflation was still not cooling much.
The Federal Reserve has recently given fewer clues about its plans than it traditionally did.
This makes some investors worry that the central bank could surprise them by keeping rates unchanged.
The decision matters because bond yields and concerns about inflation are already high.
Interest-rate markets imply about a 94% chance of a quarter-point Federal Reserve hike Wednesday.
The benchmark policy rate currently stands between 3.5% and 3.75%.
Bloomberg data since 2008 show the Fed has always delivered when hike expectations reached comparable levels.
Expectations strengthened after inflation data showed little sign of cooling and major firms shifted from a hold to a hike forecast.
Some traders bought options protecting against an unexpected hold as 10-year Treasury yields reached their highest level since 2007.
- Who
- The Federal Reserve, chaired by Kevin Warsh, and interest-rate traders are central to the report.
- What
- Markets are pricing in a likely quarter-point increase in the federal funds rate, from its current 3.5%-3.75% range.
- Where
- The decision will be made at a scheduled Federal Reserve policy meeting; no specific meeting location is stated.
- When
- The decision is expected Wednesday; the article also cites developments through Tuesday.
- Why
- Expectations rose after inflation data showed little cooling, while the Federal Reserve has said inflation must cool at a sufficient speed.
Hike Expected
Hold Still Possible
Likely policy decision
Hike Expected
Traders price about a 94% chance of a quarter-point hike, and historical data show the Federal Reserve has delivered when expectations were comparably high.
Hold Still Possible
Some traders purchased options that would benefit from an unexpected decision to keep rates unchanged.
Market surprise risk
Hike Expected
A hike is widely expected after inflation data prompted major Wall Street firms to change their forecasts from a hold to an increase.
Hold Still Possible
A hold would be an unusually large dovish surprise, but uncertainty has increased since Kevin Warsh became chair and reduced advance signaling of policy moves.
Key facts
- Expected move
- A quarter-point interest-rate increase
- Market probability
- About 94%, or roughly 23 basis points of tightening priced in
- Current policy-rate range
- 3.5% to 3.75%
- Historical comparison
- Bloomberg-compiled data since 2008 show the Fed has always hiked when expectations were this high
- Inflation backdrop
- Inflation has remained above the Fed's target for more than five years and recently showed little sign of cooling
- Treasury yields
- The 10-year Treasury yield reached its highest level since 2007 on Tuesday
- Unexpected-hold protection
- Demand increased Tuesday for short-term options that would pay off if rates remained unchanged
Quotes
Caesar Maasry
Head of investment research at Lunate
“Tomorrow’s Fed will be the most consequential one we’ve had in some time. With a hike about 90% priced, it would be nearly unprecedented for them to hold at this stage.”
livemint.com
“The market is not prepared for a hold or dovish hike.”
livemint.com
Sources
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