Doubts Related to Fed Rate Hike Make Inroads into Market


Bloomberg News reports a need for true conviction among bond traders. This is related to the policy intentions of the Federal Reserve for the first time since an aggressive tightening cycle of the central bank. 

What are the swaps priced for?

Just ahead of Wednesday’s decision of the Fed, the swaps’ price is at an apprehended 80% chance of a quarter-point hike. This is a deviation from every Fed meeting that has occurred over the last year. At these meetings, the traders have priced at least a lone such move fully. On the contrary, till now, the debate has been whether the hike in rate would be in the range of 25-, 50-, or 75-basis point increments. 

The absence or lack of conviction underscores the complex problem that the policymakers are confronting that has come around in response to the significant failure of the US bank for the first time in several decades. As such, many investors, as well as traders, believe that there must be a pause now. This pause would allow the Fed adequate time the assessment the damage, and it would also see the extent to which the new credit crunch will impact the regional lenders and how they affect the economy. 

Not priced fully

Bloomberg News reports that George Gonsalves, who heads the US macro strategy at MUFG Securities Americas in New York, believes that it is likely that the Fed might get away with the hike and just because being dovish about the outlook, they could as well not get away with the hike and instead say that they would return at a later time. 

There is uncertainty in the markets.

There prevails uncertainty in the markets, and it is mainly reflected among professional forecasters as well. 11 out of the 98 economic strategists surveyed by the experts of Bloomberg anticipate that the Fed will be announcing a pause on Wednesday. On the other hand, another shop, Nomura Securities, expects a quarter-point rate cut. 

What about Fed Chair?

Bloomberg News reports that Fed Chair Jerome Powell Wednesday will perhaps express his confidence in the latest measures. These measures have been designed to “ring fence” the stresses present in the banking system. The bond investors and the economists assess the regional lenders withdrawing from lending new loans and tightening the standards. This would only indicate that the Fed would see a weaker economy, aside from abating inflation pressures without increasing the rates. 

News source: Bloomberg

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