September or Not, Market Says Fed's One-and-Done Until Late 2016

Fed Rate Hike: A Change of Plans?
  • Swaps show even Bill Gross overestimates central-bank plans
  • Federal fund rate climb projected to follow gradual path

Bill Gross says if the Federal Reserve raises interest rates in September, policy makers are increasingly likely to wait at least six months before a second hike. Market measures indicate the wait may be twice that long.

Money market derivatives indicate the federal funds rate will average 0.59 percent one year from now. The rate would have to exceed about 0.625 percent to indicate two quarter-point increases, assuming the funds rate will trade close to the middle of the official band. The Fed has held its target for the rate in a zero-to 0.25 percent range since December 2008. 

“One-and-done, or more so one-and-done for a little while, is pretty much getting to be a consensus call, given all that is happening around us,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., one of 22 primary dealers that trade with the Fed. “The market is pricing a very, very gradual Fed hiking pace.”

In June, Fed officials reduced their median estimate for the fed funds rate at the end of 2016 to 1.625 percent, from 1.875 percent in March. They will give revised estimates after the policy meeting Sept. 16-17.

The odds of an increase in September have fallen to 30 percent from 40 percent at the end of July, according to futures data compiled by Bloomberg. October’s probability is 41 percent and December’s is 58 percent.

The Fed “seems intent on raising” its benchmark rate “if only to prove that they can begin the journey to ‘normalization,’” Gross wrote in an investment outlook Wednesday for Denver-based Janus Capital Group Inc. “They should, but their September meeting language must be so careful, that ‘one and done’ represents an increasing possibility –- at least for the next six months.”

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