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Fed hike odds rise as Warsh signals less forward guidance
Swap pricing on Tuesday implied about a one in three chance of a 25 basis point hike, even as Treasuries were set for their longest gaining streak in a month.
Ahead of the Federal Reserve policy decision, bond traders are increasingly focused on the prospect of a rate increase at the Wednesday meeting, the second under new Chairman Kevin Warsh, according to LiveMint Markets. While many market participants expect rates to be unchanged, prominent Wall Street voices have argued for a hike, reflecting concern about a shift in how the Fed communicates decisions.
The coverage points to Warsh’s approach to forward guidance as a key source of uncertainty, with Citadel Securities and PGIM among those lifting their probability of an increase. Hartford Funds fixed income specialist Joe Boyle said Warsh is reluctant to telegraph policy, leaving room for “something that’s perceived as forward guidance” to emerge unexpectedly.
By late Tuesday afternoon in New York, swap-market pricing implied roughly a one in three chance of a 25 basis point increase, even as Treasuries were on track for their longest gaining streak in a month. LiveMint Markets also cites Citadel’s Frank Flight switching his base case toward a hike, as well as PGIM’s Robert Tipp saying the market may be underestimating the probability of Wednesday’s move.
Other strategists went further, including Wrightson IC’s Lou Crandall, who said there is no good reason for the Fed not to raise rates. LiveMint Markets adds that the uncertainty is driving record hedging activity into the meeting, as traders increase wagers around the outcome.