Bond Traders’ Fortunes Hinge on Where Fed’s Rate Comes to Rest
- Expected peak has risen by more than a full point to 4.5%
- Policymakers are set to revise forecasts from June levels
The fate of many large wagers in the US bond market hinges not only on the size of the Federal Reserve’s next rate increase on Wednesday, but maybe even more so on its revised forecasts for where the policy rate will ultimately come to rest and how long it’s likely to stay at that level.
In the past week, market-implied expectations were ratcheted higher after the latest monthly inflation data showed less moderation than expected. Swap contracts that forecast rates over the next two years now peak at 4.5% in March 2023, a full point higher than was expected after the Fed’s last meeting in July. Meanwhile, the most recent year-end forecasts by Fed policymakers -- the so-called dot-plot, formulated in June -- are nearly all below 4% for 2022-2024.