© Archyde.com. Powell privately reveals one more rate hike?Fed’s favored indicator of financial stress sounds alarm
News from the Financial Associated Press on March 30 (edited by Xiaoxiang)After rising sharply in the first two trading days of this week, U.S. bond yields of various maturities were mixed on Wednesday (March 29). Investors continue to assess whether recent bank stress can be contained, and what tighter credit standards resulting from recent bank failures will mean for Fed rate policy…
Market data shows that following experiencing continuous violent fluctuations since March, the U.S. bond market finally ushered in a rare “calm year” overnight. As of the end of New York time, the yield on the 2-year U.S. bond rose 1 basis point to 4.105%, the yield on the 5-year U.S. bond fell 0.2 basis points to 3.687%, and the yield on the 10-year U.S. bond fell 0.2 basis points to 3.572%. , The 30-year U.S. bond yield fell 0.7 basis points to 3.767%.
Since the beginning of this week, the 10-year U.S. bond yield, known as the “anchor of global asset pricing,” has moved up from the six-month low of 3.285% hit on Friday, but it is still significantly lower than the October 21 hit. A 15-year high of 4.338%. The 2-year U.S. bond yield also rose above the 4% mark from a half-year low of 3.555% set on Friday, but remains well below the nearly 16-year high of 5.084% hit on March 8.
Regarding the rare calm in the bond market overnight, Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, said,“We have entered a long period of uncertainty regarding the economic and policy outlook. The reality is that there are still a lot of unknowns related to regional banks and the global banking sector. For now, we appear to be in a moment of calm.”
“Risk assets seem to be doing pretty well,” Lyngen said. “But I think they’re more of a reaction to the eventual containment of potential contagion, given what may or doesn’t seem likely to happen in the coming weeks.” , it is appropriate for monetary policymakers to remain cautious.”
Tensions in European and American banking now appear to have eased following the short-term collapses of Silicon Valley Bank and Signature Bank earlier this month. And increased confidence in the banking system has also increased the likelihood that the Fed will raise interest rates once more.
“We’re seeing a significant drop in ‘fear trade’ across all sectors. Investors believe that policymakers on both sides of the Atlantic have shielded the banking system to prevent further turmoil,” said Karl Schamotta, chief market strategist at Corpay.
Traders are currently pricing in a 41.2 percent chance the Fed will raise rates by 25 basis points at its next meeting, and a 58.8 percent chance of staying on hold, according to CME Group’s FedWatch tool.
Powell privately revealed that there will be another rate hike?
It is worth mentioning that, according to US Republican Congressman Kevin Hern, Fed Chairman Powell used the Fed’s latest interest rate dot plot as a “shield” when asked in a private meeting how much the Fed would raise interest rates this year. Forecasts from Fed policymakers suggest they will raise rates one more time this year.
“One of the things they’ve admitted recently is they expect one more rate hike this year,” Hern, of Oklahoma, told reporters following meeting with Powell.
The Fed released their latest rate forecasts — the so-called “dot plot” — following their March meeting last week, when the median forecast of 18 officials at the time was that the policy rate would hit 5.1 percent by the end of the year, up from December’s forecast. The bitmap is flat.
This means that the Fed will raise interest rates by 25 basis points this year, and the most likely time point will obviously be the next meeting in May. Powell actually reiterated the Fed’s position at the time.
Hern is chairman of the conservative Republican Research Committee. Powell met with members of the panel on Wednesday. A spokesman for the committee said the meeting had been scheduled before Silicon Valley Bank collapsed.
Fed’s favored gauge of financial stress sounds alarm
On the economic data front, Friday’s PCE price index is expected to be the next major focus on the U.S. economy, with investors also keeping an eye out for any headlines related to banking stress.
It is quite worrying that although the initial turbulence experienced by financial markets has gradually subsided in recent days, a series of credit stresses are still prevalent. A key indicator the Fed usually favors, the St. Louis Fed Financial Stress Index, continues to approach worrying levels.
The St. Louis Fed Financial Stress Index covers a range of spreads, interest rates, and other indicators, making it a veritable one-stop shop for monitoring financial stress. The spread between high-yield bonds and investment-grade bonds is one of the main variables in this indicator. The index’s initial mean is intentionally zero, implying “normal” financial markets, while a value above that indicates rising stress. Currently, the index was last at 1.57, the highest level since the early days of the outbreak.
This is clearly a harbinger of the key challenge now facing the Fed. The widening of credit spreads and the steepening of the U.S. Treasury yield curve show that the damage to the economy caused by the banking crisis has already been done.
As far as interest rate traders are concerned, the damage means the Fed will need to cut rates down the road.
This may also reflect the current real psychology of the market——That is, while traders are willing to keep the door open for a rate hike at the next meeting, they are reluctant to buy Fed Chair Jerome Powell’s assertion that there will be no rate cuts this year. The latest rate market pricing still sees the Fed likely to experience around 75 basis points of rate cuts by the end of the year.
