Market’s Vision of Sharp and Shallow Fed Hike Cycle May Be Wrong
- Money-market derivatives pricing 50 basis points of 2022 hikes
- Fed tightening cycle seen ending with rate at just about 1.6%
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Traders are betting the Federal Reserve will be forced to raise interest rates faster than it expects, and then quickly stop. They may be wrong on both counts.
It’s widely anticipated that the central bank will announce the tapering of its massive bond buying program on Wednesday. Interest-rate swaps linked to Fed meeting dates show a good chance of the the first rate hike coming in July, with around 22 basis points priced in, and around half a percentage point of tightening coming by the end of 2022. But the odds also see the Fed failing to lift its policy rate above 1.6% over the entire cycle, well below the Fed’s projections of a neutral rate of 2.5%.