September 17, 2018 / 7:33 PM / a year ago

Traders take Fed's cues, pile on bets on U.S. rate hikes

NEW YORK (Reuters) - Bond traders are increasing bets the Federal Reserve will raise U.S. short-term interest rates into 2019 as the jobs market tightens and with inflation seen climbing above its 2 percent goal.

FILE PHOTO: The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie/File Photo

Since the start of September, a number of Fed officials have expressed the view they expect more rate increases in the coming months as massive tax cuts enacted last December has boosted annual growth toward 3 percent this year.

Not only do traders now believe the U.S. central bank will hike the federal funds rate by a quarter point later this month to 2.00 percent-2.25 percent, they appear to have greater conviction the Fed will increase again in December and twice more in 2019.

More than a month ago, a rate hike in December, which would be the fourth one in 2018, was a toss-up, and traders also saw little chance the Fed would raise rates more than once in 2019.

“Clearly the odds on rate hikes are increasing,” said Alex Manzara, vice president at R.J. O’Brien and Associates in Chicago. “Sentiments are pretty bearish on rate hikes.”

As wage growth has picked up this summer, some Fed officials have reiterated the message of more rate increases.

Last week, Fed Governor Lael Brainard said the shorter-run neutral rate “may well surpass the longer-run equilibrium rate for some period.”

Another influential policy-maker, New York Fed President John Williams said this month that current economic conditions are “as good as it gets,” which would allow the central bank to raise rates further.

To be sure, the disappointing inflation data last week and the trade dispute between China and the United States may prompt the Fed to slow or to pause with its pace of rate hikes, analysts said.


Speculators’ bets that the fed funds rate will rise outnumbered those that it will fall by the widest margin in seven months last week, positioning data from the Commodity Futures Trading Commission released on Friday showed.

The increase in net shorts has occurred in line with open interest on fed funds contracts with a notable jump in the January 2020 contracts in recent days.

On Monday, the yield on two-year Treasury notes, which is sensitive to traders’ view on Fed policy, touched 2.799 percent, the highest level since July 2008.

In spite of growing expectations of more rate hikes, some analysts said traders might still be under-estimating the number the Fed would embark on before stopping, analysts said.

Back in June, Fed officials’ median projection on the number of rate increases, commonly referred to as its “dot-plot,” for 2019 was three, one more than traders’ current view.

“My fear is the market is not buying the (Fed) dots. I think there is a risk the market is underpricing the (number of) Fed rate rises in 2019 and there will be more room in 2019 (to hike),” Thomas Costerg, senior economist at Pictet Wealth Management in Geneva said of the 2020 dots in the upcoming meeting.

Additional reporting by Sujata Rao-Coverley in London; Editing by Susan Thomas

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