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Bond Market Prices Fed Hikes Despite Skepticism
Confirmed
In Short: Markets overwhelmingly expect a quarter-point hike, but the Fed’s projections and the bond market’s response may matter more to originators. Markets have already priced in a high probability of a rate hike.
Traders in rate futures are pricing in at least one Federal Reserve hike by early autumn and another next year, according to Reuters. This outlook contrasts sharply with some asset managers who expect the central bank to hold rates steady or cut them as inflation eases.
Analysts noted that this disconnect in outlook has important implications for the Treasury market. Lori Heinel, global chief investment officer at State Street Investment Management, thinks the Fed will likely cut by early 2027 and hold rates for the rest of the year.
Amrut Nashikkar, managing director and head of derivatives strategy at Barclays, noted that without the Fed's clear messaging, markets are increasingly pricing 50-50 outcomes at individual meetings.
The Fed's hawkish rhetoric has flattened the yield curve, unraveling earlier market bets on a steeper curve established before Fed Chair Kevin Warsh took office in late May.
The Federal Open Market Committee begins its two-day meeting Tuesday and will release its policy decision at 2 p.m. Nearly 53% of economists who provided longer-term forecasts expect at least one additional increase by the end of March, while financial markets are pricing in several increases through July 2027.
The bigger questions for mortgage rates are what Fed officials project for the remainder of the year, how Chair Kevin Warsh characterizes the inflation outlook, and whether the decision reassures or unsettles the long-term bond market.
The Fed lifted borrowing costs on Wednesday for the first time since 2023 and projected further increases, prompting traders to price three additional hikes by the middle of next year.
With wage growth easing and housing stagnating, Anderson forecasts disinflationary pressure in the coming months, reducing the need to raise rates.
Citi expects the Fed's next move to be a cut, projecting a 25-basis-point reduction as soon as October, while BofA Securities expects three 25-basis-point rate increases this year.
What this adds
WarpBeat previously reported that traders in rate futures are pricing in at least one Federal Reserve hike by early autumn and another next year, according to Reuters. This outlook contrasts sharply with some asset managers who expect the central bank to hold rates steady or cut them as inflation eases.
WarpBeat also noted that analysts observed that this disconnect in outlook has important implications for the Treasury market. Lori Heinel, global chief investment officer at State Street Investment Management, thinks the Fed will likely cut by early 2027 and hold rates for the rest of the year.
Background
Traders in rate futures are pricing in at least one Federal Reserve hike by early autumn and another next year, according to Reuters. This outlook contrasts sharply with some asset managers who expect the central bank to hold rates steady or cut them as inflation eases.
Analysts noted that this disconnect in outlook has important implications for the Treasury market. Lori Heinel, global chief investment officer at State Street Investment Management, thinks the Fed will likely cut by early 2027 and hold rates for the rest of the year.
What's confirmed
- Traders in rate futures are pricing in at least one Federal Reserve hike by early autumn and another next year, according to Reuters. This outlook contrasts sharply with some asset managers who expect the central bank to hold rates steady or cut them as inflation eases.
- Analysts noted that this disconnect in outlook has important implications for the Treasury market. Lori Heinel, global chief investment officer at State Street Investment Management, thinks the Fed will likely cut by early 2027 and hold rates for the rest of the year.
- Amrut Nashikkar, managing director and head of derivatives strategy at Barclays, noted that without the Fed's clear messaging, markets are increasingly pricing 50-50 outcomes at individual meetings.
- The Fed's hawkish rhetoric has flattened the yield curve, unraveling earlier market bets on a steeper curve established before Fed Chair Kevin Warsh took office in late May.
- The Federal Open Market Committee begins its two-day meeting Tuesday and will release its policy decision at 2 p.m. Nearly 53% of economists who provided longer-term forecasts expect at least one additional increase by the end of March, while financial markets are pricing in several increases through July 2027.
- The bigger questions for mortgage rates are what Fed officials project for the remainder of the year, how Chair Kevin Warsh characterizes the inflation outlook, and whether the decision reassures or unsettles the long-term bond market.
- The Fed lifted borrowing costs on Wednesday for the first time since 2023 and projected further increases, prompting traders to price three additional hikes by the middle of next year.
- With wage growth easing and housing stagnating, Anderson forecasts disinflationary pressure in the coming months, reducing the need to raise rates.
- Citi expects the Fed's next move to be a cut, projecting a 25-basis-point reduction as soon as October, while BofA Securities expects three 25-basis-point rate increases this year.
What's still developing
- "The market is way too aggressive in pricing rate hikes, mistaking that oil inflation pushing through food prices and everything else will persist," said Byron Anderson, head of fixed income at Laffer Tengler Investments.
- "Warsh made it clear that 'markets work less efficiently' when they reflect the Fed's views back," said Guneet Dhingra, head of U.S. rates strategy at BNP Paribas.
- Know more. ) The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts.
- ING’s Francesco Pesole explains that despite political noise in Germany and an additional ECB hike now expected in December, ING keeps its EUR/USD profile unchanged with a 1.160 year-end target.
- He sees similar front-end pricing for EUR and USD, expects dovish repricing on lower energy prices, but highlights mostly downside risks for EUR/USD this week, especially if Brent rises and Fed hike odds increase.
- Since we see only one more hike by both central banks this year and then a prolonged pause, the dovish repricing should be similar in size.
- Markets have already priced in a high probability of a rate hike.
- The risks to oil prices, however, are still skewed higher, as stockpiles draw down quickly and demand destruction is increasingly the only real lever left to bring the market back into balance.
- Observers expect a 25 bp increase at Japan central bank’s meeting this week, and will be looking for clues about further tightening [TOKYO] The yen’s sharp drop after the US Federal Reserve’s hawkish hike is raising the stakes for the Bank of Japan’s (BOJ) policy meeting on Friday (Sep 18), with strategists warning that the currency could weaken further unless officials convince markets that more tightening is coming.
- Friday’s expected increase would take Japan’s policy rate into estimates of the neutral range, making it unlikely that officials will signal either a 50 bp move or a sequence of back-to-back hikes, according to Maruyama.
- Still, a rate hike on Friday may not be enough to support the currency, as the central bank “may not adopt a stance as hawkish as the Fed’s, which could serve as an immediate catalyst for yen weakness”, said Akira Moroga, chief market strategist at Aozora Bank.
- Hawkish board member Hajime Takata has even kept the door open for an outsized interest-rate increase or back-to-back hikes.