Janet Yellen, chair of the U.S. Federal Reserve, during a meeting (Photographer: Andrew Harrer/Bloomberg)

Fed's Rate-Hike Odds Tumble as Washington Chaos Hits Bonds

(Bloomberg) -- The bond market is interpreting what could be the deepest crisis of Donald Trump’s presidency as throwing the Federal Reserve off its path for interest-rate increases this year.

The odds that the central bank raises its benchmark rate next month are about 60 percent, based on the current effective fed funds rate and the forward overnight index swap rate. That’s down from 80 percent a week ago. The chances they move in September are also on the decline, and the fed funds futures market isn’t pricing in a full hike until November.

Fed's Rate-Hike Odds Tumble as Washington Chaos Hits Bonds

The $14 trillion Treasuries market over the past week took in stride the firing of FBI Director James Comey and a report that Trump disclosed sensitive intelligence to Russian officials. Yet the latest revelation, which has led some Congressional officials to raise the specter of impeachment, sent benchmark 10-year yields down 11 basis points to 2.22 percent, the steepest decline since June 2016, and rattled financial markets worldwide.

“Changing Washington conditions don’t make the Fed more data dependent, but they can change the political window for policy decisions,” Jim Vogel, a strategist at FTN Financial Capital Markets, wrote in a note Wednesday. “Financial markets sit in ‘squirming’ mode.”

A memo written by Comey surfaced Tuesday alleging that the president asked him to drop an investigation of former National Security Adviser Michael Flynn. The contents of the memo have been confirmed by news organizations including Bloomberg. The administration released an emailed statement denying Comey’s version of events.

Fed officials project raising interest rates two more times this year. Strategists have forecast a move in June to provide flexibility for policy makers to either raise again in September or December, depending on financial conditions, or introduce a plan to trim the central bank’s balance sheet.

UBS Group AG, for example, pushed forward its expectations Wednesday for rate increases to June and September, from July and December. The firm doesn’t expect the Fed to raise rates and unwind its balance sheet at the same time.