The US Federal Reserve raised its policy rate by another 0.25% up to a target range of 4.50% to 4.75% on Feb. 1, 2021. Wall Street traders are taking an unexpected approach to the current economic climate by wagering that the Federal Reserve will increase interest rates higher than 6% in the course of 2021. Preliminary open interest figures indicate that trading on the Chicago Mercantile Exchange is already expanding, as reported by Bloomberg.[0]
Recent research has shed new light on the discussion around the impact of U.S. monetary policy on foreign companies. This research studies the effects of U.S. monetary policy on global firms’ sales and investment spending by drawing on cross-country firm-level data from 1995 to 2019. The abundance of the sample gives the authors the capability to investigate not only the influence of these shocks on the average foreign company, but also how country- and firm-specific traits strengthen or weaken this effect.[1] The World Input-Output Database (WIOD) is used to gain information on country-sector input-output linkages, in order to investigate how globalization via trade connectivity affects the international transmission of U.S. monetary policy.[1]
The thinking behind the current interest rate hikes flies in the face of what has been an article of faith over the past two months: that the Fed is near the end of its tightening cycle, and that rates are already high enough to cause a recession that will require the central bank to reverse course this year.[2] The consensus was challenged by the January employment data, released last Friday, and recent remarks from Fed officials.[3]
Option traders are piling into bets that the US rates could peak at 6%, and overnight index swaps are still priced for easing later this year, though not nearly to the same extent as last week.
The Fed’s chief, Jerome Powell, has said that the disinflationary process has begun and it has a long way to go.[0] At their December 2022 meeting, the Federal Open Market Committee (FOMC) raised the short-term Fed Funds Rate by 50 basis points, following a series of 75 basis point increases earlier in the year. In early 2023, the 25-basis point increase, pushing rates to 4.625%, was a sign that the trajectory of increases this year is likely to be far lower than in 2022.[4]
0. “Wall Street Traders Betting Interest Rate Will Surpass 6% This Year” Coinspeaker, 9 Feb. 2023, https://www.coinspeaker.com/wall-street-traders-interest-rate/
1. “How Much Can the Fed’s Tightening Contract Global Economic Activity? – Liberty Street Economics” Liberty Street Economics -, 13 Feb. 2023, https://libertystreeteconomics.newyorkfed.org/2023/02/how-much-can-the-feds-tightening-contract-global-economic-activity
2. “Traders Are Starting to Put Big Money on the Fed Going to 6%” Yahoo! Voices, 8 Feb. 2023, https://www.yahoo.com/now/traders-starting-put-big-money-162445600.html
3. “GBP/USD rallies to the mid-1.21s, despite big bets on a 6% Fed rate” FOREX.com, 9 Feb. 2023, https://www.forex.com/en-ca/market-analysis/latest-research/gbpusd-rallies-to-the-mid121s-despite-big-bets-on-a-6-fed-rate/
4. “The Fed And Markets” Barchart, 13 Feb. 2023, https://www.barchart.com/story/news/14154836/the-fed-and-markets