Thursday, March 9, 2017
Traders are certain that the Fed is going to hike rates at next week's meeting
Futures traders are fully convinced that the Federal Reserve will raise interest rates at its March 14-15 meeting.
On Wednesday, Bloomberg's World Interest Rate Probability reflected a 100% probability of a hike next week. The Federal Open Market Committee is expected to increase its benchmark fed funds rate by 25 basis points to a range of 0.75%-1%.
Traders hiked their bets after a report from the ADP Research Institute showed that the US economy added 298,000 private payrolls in February, the highest monthly gain since January 2006.
"Just two weeks ago I thought it was highly improbable that March was a possibility," said Greg Peters, a senior investment officer with PGIM Fixed Income.
However, expectations began to rise as several Fed officials, including Chair Janet Yellen, spoke out in support of raising interest rates sooner rather than later.
"At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate," Yellen said in a speech in Chicago on March 3.
After leaving rates near zero to heal the post-recession economy, the Fed has raised rates only twice in this economic cycle.
The Fed is expected to raise rates again even though its preferred measure of inflation — personal consumption expenditures — trails its 2% target.
The unemployment rate recently fell to a historic low of 4.8%, convincing Fed officials that the economy is near full employment. Friday's jobs report is not expected to deter the Fed from raising rates next week.
"What the Fed has to worry about is that if they hike in March, they also have to communicate to the market that this is not just a hike-every-quarter type of thing, kind of a hike cycle like we saw during the Greenspan era," Peters told Business Insider in a recent interview.