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Traders Price In Half-Point Rate Hikes at Next Two Fed Meetings

Money Market Traders Fully Price Half-Point Fed Hike for May

U.S. short-term interest-rate traders pushed the market-implied odds that the Federal Reserve will raise rates in half-point increments in both May and June to 100% Wednesday, ending weeks in which they hovered just below that level.

A 50-basis-point increase in May would be the first since May 2000. In subsequent cycles, the U.S. central bank raised rates exclusively in quarter-point steps that were clearly telegraphed to the bond market. 

Traders Price In Half-Point Rate Hikes at Next Two Fed Meetings

With headline and core inflation running at the fastest annual rates since the early 1980s, Chair Jerome Powell and other Fed officials have signaled that they’re prepared to raise rates in half-point increments if necessary. An appearance by Powell at an IMF panel Thursday will be his last before the Fed’s self-imposed quiet period leading up to the Federal Open Market Committee’s May meeting.  

The 100 basis points of hikes priced in for the May 3-4 and June 14-15 meetings is an increase from 94 basis points at Monday’s close. In the Treasury market, the policy-sensitive two-year note’s yield reached 2.625%, the highest level since December 2018, before retreating to around 2.58%. It began the year around 0.75%.

St. Louis Fed President James Bullard -- the lone dissenter from the Fed’s quarter-point rate increase in March because he favored a half-point move -- on Monday said a 75-basis-point hike shouldn’t be ruled out, although it wasn’t his base case. The central bank’s last three-quarter point increase was in 1994, toward the end of a cycle that achieved a soft landing for the economy. That outcome has been cited by Bullard in recent months as he has advocated an aggressive path.

Money markets expect 225 basis points of Fed tightening by year-end, up from 213 basis points at the start of the week.

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