Traders Bet on Hawkish Policy Mistake on Both Sides of Atlantic

(Bloomberg) -- A cohort of traders is betting the hawkish monetary lurch on both sides of the Atlantic will prove a policy mistake down the road -- forcing central banks to cut rates to salvage economic growth.

As a slew of Wall Street names including former Salomon Brothers chief economist Henry Kaufman and bond-market veteran Dan Fuss lash authorities for letting inflation run wild, one corner of the interest-rate market now suggests the Federal Reserve will be forced to reverse course in three years’ time.

It’s a trend that started in the U.K. even before the Bank of England surprised the market by raising interest rates to 0.25% last month -- its first increase in three years.

“In hiking policy rates, central banks are trying to fix an inflation problem they did not cause, and in doing so may cause more harm than good,”  wrote Jamie Searle, rates strategist at Citigroup Inc. “Policy-error pricing is creeping in for the Fed, as is already the case for the BOE.”

Fed officials are signaling higher borrowing costs to come in the grip of the highest inflation in nearly four decades in large part thanks to the chaos in global supply chains. 

Money markets are wagering on six 25-basis-point hikes in the next two years -- before the policy rate plateaus and dips slightly in 2025. In the U.K., investors are betting the Bank Rate will climb to as high as 1.35% in 18 months’ time before easing.

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