Recently, the market began discussing that the Federal Reserve may raise interest rates slightly by 25 basis points in June.
The Zhitong Finance App learned that, according to the Federal Reserve's Atlanta Regional Bank's market probability tracker, options transactions relating to the Overnight Secured Financing Rate (Overnight Secured Financing Rate) showed that the probability of an interest rate hike of 25 basis points in June was about 3.6%. The move will raise the federal funds rate target range to 5.5% to 5.75% from the current 5.25% to 5.5%.
Options traders have been considering the possibility of interest rate hikes for the past few months. On Thursday, the initial US unemployment claims data remained unchanged, showing no signs of increased layoffs. Meanwhile, factory activity indicators in the Philadelphia region showed an improvement in the situation, which was also briefly reflected in federal funds futures. However, traders have not exactly followed the path of rising US interest rates, and they prefer to think that the Federal Reserve may not act until at least September.
Scott Buchta, head of fixed income strategy at Brean Capital, said, “We are seeing more and more customers discussing interest rate hikes, and now many of them prefer to cut interest rates only once or not in 2024.”
According to this strategist, the threshold for the Fed to raise interest rates is likely to be high. He added that his company expects the US economy to continue to grow and inflation to be controlled. Policymakers may cut interest rates twice this year, and the probability of cutting interest rates three more times in 2025 is 60%.
At the same time, people are beginning to lean towards a kind of “inertial transaction,” where inflation persists, the economy remains stable, and the Federal Reserve has taken no action, leading to increased interest in short-term floating rate assets.
Speculation that borrowing costs might need to be raised heated on Thursday, as New York Federal Reserve Chairman Williams did not rule out the possibility that the central bank might raise interest rates next while speaking at an event in Washington. Williams pointed out that if data shows that interest rates need to be raised to meet the Federal Reserve's goals, then policymakers will clearly want to do so.
Monetary policy analyst Derek Tang said that “Williams has not refuted the interest rate hike” and that the Federal Open Market Committee “still has a lot of room to eliminate expectations of interest rate cuts, and this will tighten financial conditions.” Over the phone, he said, “I think they are nervous about raising interest rates again and hope to control the risk of a recession. But they don't have as much room as they did a few months ago.”
On Thursday, the one-year inflation swap rate was 2.72%, up from less than 2% in January, but far below the level of around 6% in 2022. US Treasury bonds were sold off, driving interest rates on policy-sensitive two-year treasury bonds close to 5%, and most of the three major indices closed lower.
Current discussions focus on “what long-term highs mean and how this is starting to become important in valuing risky assets,” said Robert Daly, director of fixed income at Glenmede Investment Management. He added, “Although there are still very few voices discussing interest rate hikes, discussions on rate hikes may reach a climax if we don't see a perfect scenario of falling inflation.”