Traders are betting that the Fed will not raise interest rates as aggressively as expected

Traders are betting that the Fed will not raise interest rates as aggressively as expected


Traders lowered their expectations on how far the Fed can raise interest rates on Thursday, dismissing the Fed’s own guidance of trying to control inflation during the pandemic.

Futures market transactions can give us insight into how investors are preparing for changes in the Fed’s interest rate policy in the next few years. The transaction shows that fund managers expect that the Fed’s overnight interest rate will only rise to 1.27% by the end of 2023.

This is a full 0.11 percentage point lower than the 1.38% implied on Wednesday, and Forecasts of Fed policymakers 1.6% released on Thursday.

After 2023, Sofr (guaranteed overnight financing rate) and Eurodollar futures contract transactions indicate that the Fed will find it difficult to raise interest rates. This contrasts sharply with the view of most Fed officials that interest rates will eventually climb to around 2.5%. point.

Between 2024 and 2026, the highest implied interest rate for Sofr and Eurodollar contracts is about 1.42%, which is lower than 1.5% the day before.

The disagreement between the market and the Fed highlights investors’ uncertainty about the outlook for the U.S. economy in the next few years, and how aggressively the central bank needs to take action to curb inflation It grew at the fastest rate since 1982 last month.

The Fed said on Wednesday that in view of the recovery of the labor market, it will remove stimulus measures during the pandemic sooner and is ready to raise interest rates to combat inflation. Federal Reserve Chairman Jay Powell said, “Inflation is so high, we must formulate policies in real time.”

So-called bitmap Interest rate forecast Data released on Wednesday by individual Fed governors showed that there will be three interest rate hikes of 25 basis points in 2022, and then three more interest rate hikes in 2023.

In contrast, investors are now betting that a faster tightening cycle in 2022 may lead to fewer interest rate hikes in the next few years.

“The most logical conclusion is that the market just doesn’t believe the Fed will always exceed 1.5%,” said Tom Graff, head of international fixed income at Brown Consulting. “Given that the Fed is clearly preparing to raise interest rates in early 2022, the market has determined that this will result in a reduction in the total amount of interest rate hikes.”

The chart shows the implied U.S. interest rate for Sofr futures in December 2023

Although monetary policy tightening is expected to curb inflation, some investors worry that it may begin to curb economic growth, thereby limiting the rate of interest rate hikes by the Federal Reserve. Traders and investors also warned that the rapid changes triggered by the pandemic, including the rapid spread of Omicron coronavirus variants, could complicate the Fed’s plans.

Gennadiy Goldberg, U.S. interest rate strategist at TD Securities, said of the trend of the short-term financing market: “We think these moves may be driven by market concerns about Covid.”

“Mentioned that there has been a significant increase in the number of returns from offices that have been shelved, Holiday party cancelled, So investors may worry about the impact of Omicron on economic recovery,” he added.

If the Fed’s dot-map vision is realized, it will also make the US interest rate policy out of sync with other large economies (especially the European Union).The European Central Bank said on Thursday Ruled out the possibility Raise interest rates in 2022, despite higher inflation.

Andrew Brenner, head of international fixed income at NatAlliance Securities, said: “It is difficult to reconcile the Fed’s three to four interest rate hikes, and the European Central Bank did not raise interest rates.”

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