Commodity market has doubts about FOMC aggressiveness

UNITED STATES March 21 2017 11:11 AM

NEW YORK (Scrap Register): Many market participants appear to have doubts that the Federal Open Market Committee will increase U.S. interest rates as aggressively as the Fed’s so-called dot plot, said Brown Brothers Harriman. 

Fed officials recently sounded a more upbeat tone about the U.S. economy, but this may have been mostly an attempt to ensure that last week’s 25-basis-point rate hike was not a surprise.

The FOMC statement and the forecasts simply confirmed the pace of normalization that had been previously signaled. 

Moreover, the Federal Reserve has been unable to rebuild its credibility in the sense that investors still doubt that the central bank will deliver the rate hikes that it thinks will be appropriate. If investors took seriously that the Federal Reserve would hike rates five more times by the end of next year, the two-year note would not be yielding around 1.30%.

Since last week’s FOMC meeting, the market downgraded the chances of a follow-up hike in June. Judging by the Fed funds futures strip, about one in nine think the Fed will not hike again, BBH added.

About a third thinks there may be one more hike, and one-third accepts the dots that indicate two hikes may be appropriate before the end of the year.