Traders pushed the market-implied odds of another three-quarter-point Federal Reserve rate increase in September — instead of a smaller half-point move — to the highest level since the central bank’s last meeting.
(Bloomberg) — Traders pushed the market-implied odds of another three-quarter-point Federal Reserve rate increase in September — instead of a smaller half-point move — to the highest level since the central bank’s last meeting.
The peak was reached Wednesday shortly after a Wall Street Journal article suggested the larger move appeared likely. While it was only briefly sustained, the rate of the swap contract referencing the Fed’s September meeting remains about two basis points higher on the day at the highest level since Aug. 5, when strong July employment data pushed it to its previous high.
The 3.022% rate prices in 69 basis points over the current 2.33% Fed effective rate.
Fed-Dated OIS Bid After WSJ Report Hints at 75bp Sept. Rate Hike
Forecasting the Fed’s next move is complicated by the scheduled release of the August consumer price index on Sept. 13, during the Fed’s self-imposed quiet period ahead of its Sept. 20-21 meeting. Last month, cooler-than-forecast July CPI data reversed the impact of the strong employment report. The Fed has raised rates four times since March, by 75-basis-point increments at each of its last two meetings.
“The market is starting realize that this Fed is going to keep tightening financial conditions,” said George Goncalves, head of US macro strategy at MUFG Securities Americas Inc. “It’s a little chicken-and-egg, but if the market is pricing in more of a 75-basis-point hike, the Fed should take it.”
Inflation data will need to arrive well below forecasts to stop the Fed from “tightening expeditiously,” he said. The next consumer-price-index numbers are due on Sept. 13.
The increase in policy tightening expectations followed a solid August jobs report last week. Fed Cleveland President Loretta Mester repeated Wednesday that she thinks the US central bank needs to get rates above 4% by early 2023. Fed Chair Jerome Powell, scheduled to speak Thursday, may focus on the need to tighten further to slow the labor market, after delivering a hawkish message at Jackson Hole in late August.
“You are not going to get inflation back to 2% unless you create slack in the labor market and the jobs report still shows demand for labor is strong,” said Steven Blitz, chief US economist at TS Lombard. “Powell is calling the bond market’s bluff” and he expects a three-quarter rate increase this month from the Fed and that the policy rate will rise to a range of 4% to 4.25%.
Treasuries gained Wednesday, following a sharp selloff as trading resumed Tuesday after a long weekend. The drop in Treasury yields lagged steeper declines in UK gilts and most euro-zone bonds as policy tightening wagers were pared ahead of the European Central Bank meeting on Thursday. Meanwhile, the Bank of Canada raised its policy rate by 75 basis points, in line with expectations.
(Updates with commentary, context and market moves from fifth paragraph.)
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