The US Federal Reserve could potentially follow next week’s expected quarter-point jump in interest rates with a jump twice as large in the next few months.
Bond traders are virtually certain the US Federal Reserve will raise interest rates by a quarter of a percentage point on Wednesday. What they are watching for is where theTwo-year Treasury yields, which are highly sensitive to monetary policy changes, have already climbed to the highest since September 2019, with the central bank poised to begin a cycle of rate increases to slow the steepest inflation surge in the US four decades.
Since Mr Powell said he favours a quarter-point move next week but is open to larger changes if warranted, traders are pricing in a roughly 50-50 chance of a 50 basis point move at the following meeting in early May. Bond market gauges of expected inflation, known as breakeven rates, have reached record levels on some maturities. That is a warning sign of a potentially more aggressive Fed path since officials have shown concern in the past that expectations of rising prices can add to actual inflation.The backdrop has some warning that the Fed might have to lift its policy rate to a peak beyond the sub-2 per cent area derivative markets are now pencilling in.
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