Rates Traders See Fed Stuck at Zero, or Lower, Into 2024

(Bloomberg) -- Bond traders see little prospect of a Federal Reserve rate increase for the foreseeable future, as they bank on borrowing costs near zero for roughly the next three years -- with some even hedging against the possibility they could go negative.

The rate on three-month eurodollar futures contracts is relatively flat and it’s not until late 2023 or early 2024 when signs pick up that the next Fed hike appears to be priced in. The spread between the March 2022 and 2023 contracts reflects only around half of a full quarter-point hike. Meanwhile, there’s been appetite for eurodollar options that protect against the scenario of negative U.S. dollar interest rates.

Fed Chairman Jerome Powell on Wednesday said policy makers are not “in any hurry to move rates up” after warning that the coronavirus pandemic poses considerable risks to the economy over the medium term -- or the next year or so. The central bank left rates near zero, as expected.

“A rate hike is just not on the agenda,” said Jeffrey Cleveland, chief economist at Payden & Rygel, which manages more than $114 billion.

Officials left in place relatively vague guidance on the path of rates, saying they’d keep the benchmark target range near zero until they’re “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Data Thursday are expected to show that another 3.5 million Americans lost jobs in the past week as many businesses remain shuttered to halt the virus’s spread.

“Powell highlighted the risks to the outlook that, to me, suggest the recovery will be far more like an elongated U than a V,” Cleveland said via email. “If that’s true, then it could take years for the economy to return to pre-virus levels of economic output,” potentially 2023 or later, he said.

Economists surveyed by Bloomberg this month predicted the Fed will hold interest rates near zero for three or more years. That’s more pessimistic than when the economy was last in recession.

Click to see table of forecasts.

In June 2009 when the previous recession was ending, the median forecast of economists was for the Fed to lift its benchmark rate from near zero in the third quarter of 2010. Instead, it took until December 2015 to tighten.

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