NEW YORK – Interest rate futures tied to the Fed’s policy rate were priced in on Friday, ahead of the Fed’s November or December policy meeting, after Chairman Jerome Powell struck a tone seen as dovishly hawkish by market participants. More likely to tighten policy.
However, the Fed is widely expected to hold interest rates steady in a range of 5.25% to 5.50% at its Sept. 19-20 meeting.
Powell said on Friday that Fed policymakers would “exercise caution in deciding whether to tighten policy further,” but he also made clear that the central bank has not yet reached a conclusion on whether its benchmark interest rate is high enough to ensure inflation returns to its 2 percent target. .
He was speaking at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming.
“It was clear from the beginning that the chairman wasn’t going to plant any seeds of hope in the doves,” said Ellis Phifer, managing director of fixed income capital markets at Raymond James in Memphis, Tennessee.
“Both the economy and the labor market are running faster than the Fed expects, but inflation is cooling and is expected to be. The Fed’s long-term higher stance remains intact.”
In volatile trade, Refinitiv’s FedWatch on Friday showed about a 53 percent chance of a rate hike between Oct. 31 and Nov. 11. 1 session. For the Dec. 12-13 meeting, the odds are about 52%.
At the CME, its own FedWatch tool shows a slightly higher probability of a rate hike than Refinitiv’s: around 57% for the November meeting and 55% for December. A week ago, the odds of a rate hike were 36.1 percent and 31.7 percent, respectively.
Interest rate futures, which are tied to the Fed’s policy rate, have moved notably over the past few weeks.
The recent recovery in U.S. Treasury yields could help underpin the Federal Reserve’s efforts to sap demand and slow growth momentum in an economy that has so far largely shrugged off the most aggressive monetary tightening in more than a generation.
The Federal Reserve has raised policy rates from near zero to the current range of 5.25% to 5.50% in March 2022, but the unemployment rate remains at a historically low 3.5% and overall economic growth is outpacing expectations of a slowdown expected.
Interest rate futures have also repriced significantly as bond yields have risen. A shift in interest rate futures now sees a rate hike at either of the final two meetings of the year, even as expectations for the Fed to stay on hold next month remain firm.