Here’s a look at the changes in the Fed funds futures curve over the past week and how they compare to last month:
After the US jobs report on Friday last week, traders moved into more pricing higher for longer The Fed’s narrative didn’t change much even after yesterday’s weekly jobless claims data.
When compared to a month ago when traders were seeking three rate cuts by the end of the year, this was a significant shift in expectations as the Fed succeeded in getting their message across.
It all comes down to the next letter that will be from Powell & Co. They make their decision next week. If they keep rates unchanged, i.e. pause, I would expect them to be hawkish (or at least try to be) as they will probably talk about the chances that they might “skip” a meeting before raising rates again.
However, we know how easily the markets can fluctuate, and all it takes is just one wrong call and the dove gates will open.
But if the Fed decides to raise interest rates by another 25 basis points, that will certainly mean more pain for risk assets and there will be a significant repricing across the broader markets. In turn, expect this to lead to a strong rally in the dollar unless the Fed explicitly says that this will be the final rate hike and that they will pause to re-evaluate the move forward.