- Lucas Jackson/Reuters
Futures traders are fully convinced that the Federal Reserve will raise interest rates at its March 14-15 meeting.
Last week Wednesday, Bloomberg’s World Interest Rate Probability reflected a 100% probability of a hike in March for the first time. On Tuesday, CME Group’s FedWatch tool, which reflects the probability of rate moves, showed a 93% chance.
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%.
“The FOMC meeting already happened,” said Neil Dutta, the head of economics at Renaissance Macro, in a note to clients on Monday.
Expectations began to rise as several Fed officials, including Chair Janet Yellen, spoke 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.
Traders hiked their bets after a report from the ADP Research Institute last week showed that the US economy added 298,000 private payrolls in February, the highest monthly gain since January 2006. The government’s jobs report confirmed this strength on Friday, showing a gain of 235,000 nonfarm payrolls and a drop in the unemployment rate to 4.7%.
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.
And so unlike typical hiking cycles, the Fed’s readiness to raise rates now is not an effort to cool down the economy, but to bring rates closer to a level considered normal.
“This is the first tightening cycle where they’ve been concerned about inflation being too low,” said Alan Levenson, the chief economist at T. Rowe Price. “That’s causing them to go very slowly,” he told Business Insider.
“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,” Greg Peters, a senior investment officer with PGIM Fixed Income, told Business Insider.