Bond traders have been ratcheting up bets that the Federal Reserve isn’t done with its interest-rate hikes just yet. Next week will help determine if they’re right.
The monthly consumer-price index report on Wednesday will provide the latest insight into how much further the central bank may need to go to pull inflation back toward its target. With the economy defying gloomy forecasts and energy prices rising, economists are forecasting the biggest monthly jump in 14 months — and the swaps market is pricing in risk that it will come in even higher than expected.
“Next week’s CPI data could provide a little bit more color” on the likely path for the Fed, said Leslie Falconio, head of taxable fixed-income strategy at UBS Global Wealth Management. “It’s not our expectation that the Fed moves in September. But while as of right now we say they don’t move in November either — you really have to give it a 50/50 chance.”
Fed officials have repeatedly emphasized that they remain mindful of the upside risks to inflation and may need to keep interest rates elevated even once they stop increasing them. The market is also trying to gauge how much the Fed may be able to ease policy next year, given the economy’s strength and lingering inflation pressures. Futures are priced for the central bank’s benchmark to end 2024 around 4.4%, well above the roughly 2.5% rate that’s seen as neutral to economic growth.
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