Market Outlook on Fed Rate Hikes Is Waning

  • Expectations for three rate increases in 2017 are uncertain
  • Stock market rally obscures red flags in fed funds futures

RBC’s Porcelli Says Change Is Coming at the Fed

While most "Trump Trades" are alive and well, doubts are cropping up when it comes to the pace of Federal Reserve tightening.

"If the Fed wants to raise rates at their meeting on March 15, then they need to start working on pushing up market expectations," Torsten Slok, Deutsche Bank Group AG’s chief international economist, wrote in a note. "One interpretation of the chart below is that markets are feeling less certain that the assumptions underlying the ongoing Trump trades will be realized."

After peaking in December, following Donald Trump’s surprise presidential win and the second rate hike from the Fed, there has been a steady decline.

Odds of 3 hikes

Strategists started drawing attention to this measure late last year. David Woo, Bank of America Merrill Lynch’s global head of rates and currency research, for instance, pointed to how important rate expectations would be this year given Trump’s campaign promises on fiscal spending, lowering regulations and easing the corporate tax burden.

An analysis of fed fund futures trades shows a 28 percent chance of a 25 basis point increase in the target range, according to Bloomberg calculations. The odds of an increase at the Fed’s June meeting is 69 percent.

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