Reports of the Death of Fed Rate Hikes May Have Been Exaggerated
(Bloomberg) -- Money markets appear to have completely nixed the idea of Federal Reserve interest-rate hikes in 2019, although the outlook may not be so simple.
Some say the recent repricing may have gone too far, and one observer suggests that the signals across different fixed-income markets are more mixed. Investors dialed back their expectations for the U.S. central bank’s future interest-rate path after the last Federal Open Market Committee meeting, which saw officials maintain a generally upbeat view of the economy even as they trimmed their own projections for policy tightening.
Stocks have plummeted since that Dec. 19 decision, while Treasuries have surged and fed funds futures currently indicate that the central bank benchmark will be pretty much unchanged a year from now. NatWest Markets’ John Briggs is sounding a note of caution, though.
“At this point in time, to completely price out the Fed, it feels premature,” said NatWest’s head of strategy for the Americas. “We don’t have to go back to pricing two or more rate hikes, but one is only 25 basis points.”
Traders are betting via fed funds futures and overnight index swaps that the Fed will not hike interest rates in 2019 and have started pricing in the prospect of a cut in 2020.
According to Jim Vogel at FTN Financial Capital, there is some discrepancy between that view and how the outlook is being priced by short-dated Treasuries. And that makes trying to gauge what the market really thinks a somewhat murkier proposition.
There’s “still no coherent view of Fed rate policy past the first three quarters of 2019,” Vogel said. “With the exception of a clear vote for lower inflation expectations in all curve segments, the bond market has yet to price any fundamental opinion other than to disagree with the Fed’s view.”
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