Market pricing for a US Federal Reserve interest-rate hike by September is about 75%, with better-than-even odds of a Fed rate hike as early as July.
Five days ago, the market had no hint of a rate-hike expectation at all this year, let alone for July, and indeed showed traders firmly believed the Fed’s next move would be to reduce borrowing costs.
That is a huge swing. As recently as last month, financial markets reflected an expectation for two interest-rate cuts by the end of the year.
For the first couple of weeks of the Iran conflict that began on February 28, markets continued to think the Fed would ease policy, looking through the effect of higher oil prices.
Fed policymakers largely echoed that view.
The reversal began this week as the Iran conflict escalated and Fed Chair Jerome Powell indicated he did not believe the risks to the job market outweighed risks to inflation.
On Thursday and Friday, the shift gathered steam, particularly after Fed Governor Christopher Waller, an influential dovish voice at the central bank, said the risk of persistent inflation arising from the war with Iran was strong enough to convince him to cast his vote for keeping interest rates on hold this week, instead of cutting them as he had previously thought he would.
Stocks have dropped and the yield on the two-year Treasury note – which closely tracks the direction of Fed policy – jumped.
