According to US media analysis, investors have begun to rehearse the Fed's response to the "non-landing" situation of the US economy. In just a few short weeks after a series of seemingly certain rate cuts, some have even begun to anticipate the need for further rate hikes.
A few weeks ago, market expectations of an imminent rate cut led to the point that Fed Chair Jerome Powell publicly warned that a rate cut in March was unlikely. And less than three weeks later, traders have not only ruled out a rate cut in March, but May also looks unlikely. Swaps show that even the market's confidence in a rate cut in June is wavering.
** Says the latest hot debate at the moment is that the next move may not be a rate cut at all. Former US Treasury Secretary Lawrence Summers expressed the view that many market participants are already considering on Friday: "The next move to raise interest rates is very likely. ”
Summers hinted that there is about a 15% chance that the Fed will raise interest rates next. More asset managers believe that this probability is 20%.
Even if another rate hike is too hard to accept, some Fed watchers are in a situation similar to the late '90s: only a brief period of rate cuts that paved the way for subsequent rate hikes. Although some analysts insist that interest rates will be cut by 75 basis points this year, they also warn that there are many possible and reasonable outcomes in the direction of interest rates, and it is difficult to maintain a high degree of confidence in the certainty of this year's interest rate cut.
In recent weeks, no Fed** has publicly signaled that further rate hikes are on the table. Powell said on January 31 that "we believe the Fed's policy rate may have reached the peak of this tightening cycle." On Friday, San Francisco Fed President Mary Daly, who is seen as centrist, said a 75 basis point rate cut in 2024 was a "reasonable baseline expectation."
At the same time, the Fed has not provided "forward guidance" on the medium-term interest rate policy framework, as it has sometimes done in the past, leaving investors with less basis for judgment. And this month's volatile economic data led to volatility in U.S. Treasuries,** and swaps.
U.S. Treasury yields rose sharply after CPI and PPI data exceeded expectations, with the CPI services index being the largest in nearly two years. While January's decline in retail sales provided a counter-argument for an overheated economy, January job growth also outpaced**. Last week, two-year, three-year and five-year Treasury yields all reached their highest levels since early December.
Some analysts said that the last few yards of this inflation fight will be full of bumps, although they believe that it makes more sense for the Fed to stay at current interest rate levels for longer in order to ensure that inflation is calmed, but analysts also agree with Summers' assessment of the risk of raising interest rates.
Now, even some who expect a rate cut are advocating insurance for this bet. Institutional investors have been shorting two-year Treasury bonds since December, despite rising interest rates since the start of the year, and half of them** have been covered. There are also foreign exchange strategists who said last week that if "the US economy re-accelerates and the Fed will eventually have to tighten policy again, the dollar will **" could return to its all-time highs in 2022.
An analysis of the short-term interest rate options market showed that traders began to bet on some possibilities for the Federal Reserve to raise interest rates over the next year following the release of CPI data last Tuesday. Analysts who are expecting two or three rate cuts this year say this unusual demand for options is because it's a cheap way to protect portfolios built around fundamentals, "and people are trying to figure out that their portfolios are going to collapse and hedge against that." ”
Citigroup strategists also said that the risk that "the Fed will only go through a very short easing cycle and then start raising interest rates shortly after" should be more hedged. The bank's economists had expected the Fed to cut interest rates for the first time in June, but also said there was a chance of a repeat of what happened in the late 1990s in the coming years, which was to cut rates first and then raise them.
In 1998, the Federal Reserve cut interest rates three times in a row to contain a financial crisis triggered by Russia's debt default and the collapse of the hedged** long-term capital management company. Then, in June 1999, the Fed began a cycle of interest rate hikes to curb inflationary pressures.
In addition to fluctuations in domestic economic data, analysts said interest rate policy is subject to international considerations, including higher freight costs due to the Red Sea conflict and the disruption or slowdown in shipping due to drought in the Panama Canal. Analysts say all this could lead to the risk of "easing idling out" and it would be very difficult. Analysts believe that this year's interest rate market will see extreme volatility on both sides.