Traders raise bets on two more Fed rate rises this year
The shift puts market pricing well beyond the Fed's own median projection of one further move
Published
Traders have added to bets that the Federal Reserve will raise interest rates twice more before the year is out. That marks a shift from recent positioning, which had markets pricing in just one more hike, in line with the Fed's own median projection.
The Fed lifted its target range by a quarter point to 3.75%-4% this month, a move traders had already priced with 95% certainty beforehand, and the vote was unanimous at 12-0. Fed officials' median forecast points to rates at 4.1% by the end of 2026, with four members seeing 4.4% and two seeing 3.9%, and the committee has also nudged up its estimate of the long-run neutral rate to 3.25%.
Fed voices have leaned hawkish since the decision. Kevin Warsh said too many inflation categories are still running above 3% and that the Fed's job is price stability, not the labor market, which he described as being in good shape. Deutsche Bank's Matthew Luzzetti said the Fed's patience has run out. The dollar has moved with that tone: the U.S. Dollar Index rose 0.53% to 100.19, its highest level since July 31, after the Fed's hawkish hold, while sterling fell 0.66% to $1.3387, the euro dropped 0.58% to $1.1474, and the dollar rose 0.51% against the yen.
The new pricing sits awkwardly against a Fed leadership that has signaled the hiking cycle is largely done. Traders positioning for two more moves this year, beyond what the Fed itself projects, points either to a bet on a policy reversal or to expectations that the economy is weakening faster than officials admit. Either reading is unfavorable for equities, which have been supported by hopes that tightening is finished.