Source: Wall Street News
The analysis indicates that once the core inflation rate rises above 3%, the possibility of interest rate hikes will increase. The market generally expects the March core PCE to be 2.7% year-on-year, which will be released on Friday.
With US bond yields booming and the S&P 500 falling for six days, will the Federal Reserve raise interest rates again this year?
According to media reports on Tuesday, as US economic data continues to be strong and Federal Reserve officials make hawkish remarks, investors are beginning to bet that the Federal Reserve may raise interest rates again. This prospect was once considered unimaginable.
Analysts pointed out that investors' expectations for the Federal Reserve to raise interest rates again continue to heat up. The options market currently shows that the possibility that the US will raise interest rates within the next 12 months is about 20%, a sharp increase from the beginning of the year.
Columbia Threadneedle interest rate strategist Ed Al-Hussainy pointed out that option pricing reflects a 20% chance of interest rate hikes this year. An analysis by Benson Durham, head of global policy and asset allocation at Piper Sandler, shows that the probability of interest rates rising in the next 12 months is close to 25%, while an analysis of Barclays options data shows that this possibility is 29%.
This shift in expectations had an impact on the bond market. Interest rate sensitive two-year US Treasury yields once climbed to 5.01%, reaching a five-month high, while US stocks experienced their longest continuous decline in 18 months before surging on Monday.
The next step is to cut or raise interest rates?
As US inflation surpassed expectations for three consecutive months, options market investors began to seriously consider the possibility of the Fed raising interest rates. Former US Treasury Secretary Summers said that the continued inflationary pressure shown in the latest data shows that the Fed's next policy action may be to raise interest rates rather than cut interest rates. Summers believes that the probability of the Fed's next move to raise interest rates is as high as 15%.
Richard Clarida, economic adviser to Pimco and former vice chairman of the Federal Reserve, stated:
If the data continues to disappoint, I think the Federal Reserve will have to reconsider raising interest rates. Although interest rate hikes are not his basic situation, once the core inflation rate returns above 3%, the possibility of raising interest rates will increase.
Currently, the market generally expects that the Federal Reserve's most popular inflation indicator, the core PCE index in March, may reach 2.7%. In response, PGIM Co-Chief Investment Officer Greg Peters said:
Considering that interest rate hikes are completely reasonable, I feel more optimistic about market pricing compared to the beginning of the year, when interest rates were cut only in extreme cases.
New York Federal Reserve President Williams previously pointed out that the current economic situation means there is no need to cut interest rates. At the same time, he added, “If the data shows that we need higher interest rates to meet our goals, then we will obviously consider this move.”
Furthermore, although the market is using options to hedge against the risk of or profit from interest rate hikes, there is still a possibility that interest rates will be cut rapidly. Interest rate cuts are still basic scenario predictions. According to futures market pricing, traders expect to cut interest rates by 25 basis points once or twice this year, lower than the six to seven times in January.
editor/tolk