Traders Expect Fed to Raise Rates Next Year in March

Traders had placed bets on a 2015 Fed funds rate hike for the first time in almost a decade. However, now they are pushing back the expectations until March of next year. The probability assigned to the rate hike is down to 56%, which makes it barely better than a game of rocks, paper, and scissors.

The Fed’s decision to hold the rates at current levels in September undermined investor’s confidence of a rate hike this year. This is despite the fact that Fed Chair Janet Yellen was among the policy makers who considered a boost in rates likely in 2015.

According to Gary Pollack, the fed have been optimistic about the forecasted growth rate. However, the market is signaling lower growth expectations down the road. As a result it is highly unlikely that the Fed will raise rates this year. Pollack manages $12 billion for Deutsche Bank AG’s Private Wealth Management unit in New York.

Last month, around 142,000 new jobs were added in the US that followed an increase of 136,000 jobs in August. This was revised down from the expected addition of 201,000 and 173,000 jobs in August and September respectively.

The Fed will have two more policy meetings on rates this year. The next decision will be made on Oct. 28 followed by an announcement on Dec. 16.

According to Peter Tchir of Brean Capital LLC, an increase in the Fed funds rate is highly unlikely this year, and it would be a policy mistake if the Fed does decide to increase the rates.

Recent macroeconomic conditions had heightened the prospect that the Fed will raise the funds this year. However, most traders now believe that the Fed will increase the rates in March next year.

Jim Vogel, head of FTN Financial Capital Markets in Memphis, states that market factors are signaling that any increase in the Fed rates will occur much later down the road. Traders now see a mere 33% probability that the Fed will increase rates in December this year, down from 60% a month earlier. The likelihood of an increase in Fed fund rate in January is about 41% with the assumption that the rates will average 0.375% after the increase.

BNP Paribas SA, one of the primary dealers that trade with the Fed, stated in a bank note that it now sees a rate liftoff in March next year, compared with previous projections that there was a 60% chance of increase in fed rates in December this year.

Priya Misra, who heads TD Security’s global interest strategy in New York, stated that the current situation is clearly bad for the bond market and that is why you are seeing this big reaction from the market.

Due to the record low rates, the benchmark yield on Treasury bonds touched 1.9% which is the lowest since August 24. The yields on two year Treasuries also have dropped by 7 basis points to 0.58%, which represents the steepest decline in rates since the Fed’s decision to hold the rates last month.