Traders Are Too Certain About the Path for Rates
Rarely in the modern era has there been so much faith that policy makers will do what they say they will do.
Fed Chairman Jerome Powell is poised to raise interest again in a few weeks.
Photographer: Andrew Harrer/Bloomberg
With quantitative easing in the rearview mirror, the Federal Reserve is delivering its message to the markets much more directly than in the past. Concerns of financial stability have been replaced with inflation concerns. In turn, traders feel more confident about the future path of the Fed’s interest-rate target than ever before. Be concerned.
The chart below shows the odds, based on federal funds futures, that the Federal Open Market Committee will hike rates at the three remaining monetary policy meetings this year where Chairman Jerome Powell will hold a press conference. The markets are so certain that they are pricing in extremely high odds well in advance of the meetings. The odds of a boost at the June 13 meeting (blue line) hit 100 percent on May 2, or 41 days before the meeting. The odds of an increase at the Sept. 26 meeting (red) exceeded 80 percent on May 7, or 142 days before the meeting, before easing to a still historically high 67 percent following the release Wednesday of the minutes from the Fed’s last policy meeting.