Bets rise on higher Fed hike in March after employment data

Traders in the US swap market increased bets that the Federal Reserve will raise interest rates by 50 basis points in March, and January’s strong jobs report stoked speculation that the central bank is ready to go. to act aggressively to cool down the economy.

Overnight rate swap pricing tied to Fed meeting dates indicates a fed funds rate of about 44 basis points after the March meeting, about 36 basis points above the funds rate current effective federal funds, which stands at 8 basis points.

Basically, that means traders are looking at roughly equal odds that the Fed will kick off its hike cycle with the first half-percentage-point hike since 2000, rather than a typical quarter-point hike.

The rise in bets reflects the dramatic price revision that has swept through financial markets in the wake of the jobs report, which sent Treasury yields higher across the board.

At the end of the day Thursday, swaps traders were only pricing in a 20% chance of a 50 basis point hike at the March meeting. Longer term, about 135 basis points, or almost five and a half quarter percentage point hikes, are now priced in until the December Fed meeting, up 10 basis points from Thursday’s close.

While more traders expect a bigger rate hike at the March meeting, prior to Friday’s report, Fed officials had made it clear that such a hike was not on their agenda.

None of the six Fed officials who have spoken so far this week have endorsed the idea of ​​a half-point hike in March and James Bullard, the St. Louis Fed president and the most hawkish, said five increases this yearnot a bad bet”.

The tightening outlook from US traders comes after US jobs data supported the case for faster monetary policy tightening.

While the magnitude of the March rate hike is still up for debate, what is clear is that markets continue to compress the rate hike cycle closer to the start of this year.

Swaps are pricing in three rate hikes through June, suggesting one for each of the Fed’s March, May and June meetings. Markets also expect the central bank this year to start reducing its huge asset holdings by not rolling over maturing bonds, removing another source of financial market support.