(Bloomberg) - Traders are betting the Federal Reserve’s urge to hike borrowing costs aggressively in the face of surging inflation will force it to swiftly reverse course as tighter policy begins to slow economic growth.
Short-dated forward swaps point to a quarter-point rate cut within two years -- among the most aggressive wagers in this portion of the curve in at least 15 years. It comes as the extra yield demanded by investors to hold U.S. five-year debt over 30-year paper climbed above zero for the first time since 2006 on Monday, a sign that has previously portended a downturn.
The pricing is perhaps the clearest sign yet that Fed Chair Jerome Powell’s commitment this month to hike rates in 50-basis-point increments if necessary is beginning to irk the market. Traders ramped up their wagers after the hawkish tilt, and now see the Fed funds rate peaking close to 3% as soon as a year ahead, according to forward swaps. That’s well above the banks’ estimated neutral rate of 2.375%, which would neither stimulate nor slow activity.
The Fed raised its benchmark lending rate by a quarter point this month to a range of 0.25% to 0.5%, the first such increase since 2018. Overnight interest-rate swaps tied to Fed meetings are pricing three half-point hikes and two quarter-point increases by year-end, about 50 basis points more than what was expected just after the March 16 policy meeting.
It’s a similar picture in the U.K. where the Bank of England is expected to hike the bank rate toward 2.5% from 0.75% currently, in an effort to choke off inflation. However, the scale of the subsequent easing is greater there, with almost 40 basis points of easing expected by the beginning of 2024.
By James Hirai
