Contrarian Bet: Some Traders See US Federal Reserve Hiking Interest Rates
IT’S at best, a longshot, but one that’s emerged among a group of die-hard bond traders – that the US Federal Reserve’s next move on interest rates will be up, not down.
A Contrarian View
The wager, which arose after a blowout jobs report on Jan 10, stands in stark contrast to the consensus on Wall Street for at least one rate cut this year. That contrarian bet has remained in place even after a benign inflation report on Wednesday (Jan 15) strengthened the Fed’s rate-cutting stance and caused yields in the US Treasury market to retreat from multi-year highs.
Options Market
Based on options linked to the Secured Overnight Financing Rate, traders currently see about a 25 per cent chance that the Fed’s next move will be to lift rates by year end, according to an analysis by Bloomberg Intelligence as at Friday’s close. Those bets were as high as 30 per cent before the consumer price data. Up until over a week ago, a hike was not even entertained – 60 per cent of options traders were betting on more Fed cuts and 40 per cent for a pause.
Phil Suttle’s View
Phil Suttle, a former New York Federal Reserve economist who now runs his namesake advisory shop, sees the Fed hiking rates in September. “I have them not cutting at all. And that’s not a mad dog view,” he said on Friday.
Expectations
Suttle expects Trump, who takes office on Monday, to push through tariffs and restrict immigration, thus lifting inflation. The US is already starting to see wages pick up again, he said.
Market Expectations
For now, Suttle’s view remains extreme. Bond traders have fully priced in a quarter-point rate cut for this year and saw roughly 50 per cent of a chance for a second reduction, compared with just one cut a week earlier. On Thursday, Fed governor Christopher Waller said policymakers could lower rates again in the first half of 2025 if inflation data continue to be favourable.
Conclusion
While the bar for rate hikes is high, the Fed has quickly reversed course before. In 1998, officials cut rates three times in rapid-fire succession to short-circuit a financial crisis brought on by the Russian debt default and the near-collapse of hedge fund Long Term Capital Management. The Fed then began increasing rates in June 1999 to contain inflationary pressures.
FAQs
Q: What is the current probability of a rate hike this year?
A: According to Bloomberg Intelligence, traders currently see about a 25 per cent chance that the Fed’s next move will be to lift rates by year end.
Q: Who is Phil Suttle?
A: Phil Suttle is a former New York Federal Reserve economist who now runs his namesake advisory shop.
Q: What is the current market expectation for rate cuts?
A: Bond traders have fully priced in a quarter-point rate cut for this year and saw roughly 50 per cent of a chance for a second reduction, compared with just one cut a week earlier.
