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Former Dallas Fed Chief Warns of Over-Priced Rate Hikes
Confirmed
In Short: 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.
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, believes the Fed will likely cut rates by early 2027 and hold them for the rest of the year.
Kevin Warsh, the current Fed chair, emphasized that 'markets work less efficiently' when they reflect the Fed's views back. This hawkish rhetoric has flattened the yield curve, unraveling earlier bets on a steeper curve.
The Federal Open Market Committee began its two-day meeting on Tuesday, with a policy decision expected at 2 p.m. Nearly 53% of economists expect at least one additional increase by the end of March, while financial markets are pricing in several increases through July 2027.
Markets overwhelmingly expect a quarter-point hike, but the Fed’s projections and the bond market’s response may matter more to originators. 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 two-year Treasury yield jumped as markets started pricing in more hikes, with the Fed’s accompanying economic projections brimming with “hawkish overtones,” signaling more rate hikes to come.
The vote was unanimous among the Federal Open Market Committee’s 12 voting members, with the Dow Jones shedding more than 600 points as the reality of higher interest rates and lingering inflation sank in on financial markets.
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, believes the Fed will likely cut rates by early 2027 and hold them for the rest of the year.
- Kevin Warsh, the current Fed chair, emphasized that 'markets work less efficiently' when they reflect the Fed's views back. This hawkish rhetoric has flattened the yield curve, unraveling earlier bets on a steeper curve.
- The Federal Open Market Committee began its two-day meeting on Tuesday, with a policy decision expected at 2 p.m. Nearly 53% of economists expect at least one additional increase by the end of March, while financial markets are pricing in several increases through July 2027.
- Markets overwhelmingly expect a quarter-point hike, but the Fed’s projections and the bond market’s response may matter more to originators. 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 two-year Treasury yield jumped as markets started pricing in more hikes, with the Fed’s accompanying economic projections brimming with “hawkish overtones,” signaling more rate hikes to come.
- The vote was unanimous among the Federal Open Market Committee’s 12 voting members, with the Dow Jones shedding more than 600 points as the reality of higher interest rates and lingering inflation sank in on financial markets.
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.
- 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.
- 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.
- Mortgage pricing responds more closely to longer-term Treasury yields, inflation expectations, and demand for mortgage-backed securities.
- Markets are now pricing a 92 per cent probability that the Fed will raise rates Gold prices are inching upwards on Wednesday as high oil prices continue to fuel inflation concerns and as interest-rate hike bets are near-certain ahead of the Federal Reserve’s policy decision.
- Rising energy costs are driving bond yields up, and markets are now pricing a 92 per cent probability that the Fed will raise rates.
- 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.