The Market Is Doubting the Fed’s Timetable

The Federal Reserve has said that it doesn’t see itself raising interest rates until late 2014. Well, that’s fine and good. Guys in suits can say whatever they want, but the market often has other ideas. Right now, the market thinks a rate increase may come sooner than the Fed realizes.

As I’ve pointed out before, longer-term interest rates are slowly beginning to creep higher. For over three years, Benrnanke & Co. have kept overnight rates between 0% and 0.25%. Howard Packowitz at the WSJ notes that the futures market is doubting the Fed’s forecast:

Fed-funds futures Tuesday priced in a 90% chance for the FOMC to lift the funds rate to 0.5% at its meeting in late June 2014, from a 94% chance at Monday’s settlement.

An earlier rate hike is possible based on pricing of a shorter-dated contract. It priced in a 40% chance for a 0.5% rate after the late-January 2014 FOMC meeting, up from a 36% chance at Monday’s settlement.

It’s still too early to say exactly what the Fed will do, but I think it’s very possible that the Fed will move before late 2014. This changing market sentiment is also what’s leading investors to take on riskier assets (this is a theme I discussed in last week’s CWS Market Review). In the meantime, watch how cyclical stocks perform relative to the broader market. That will most likely be an early indicator of higher rates.

Posted by on February 15th, 2012 at 10:26 am

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