Could the Fed surprise markets with a rate hike on Wednesday? It's certainly possible, although it wouldn't come as a complete shock — on Monday, fed funds futures pricing of a quarter-point hike reached 40% at one point. That's eased back to around 35%, which is still remarkably high only 48 hours away from the decision.
Based on market pricing, analysts at HSBC calculate that Wednesday's decision is the most uncertain in two years and one of the least certain in over four years. As they note, in the era of forward guidance, uncertainty so close to an FOMC meeting is unusual. But new Fed Chair Warsh has consigned forward guidance to history. Maybe this lack of visibility is the new normal.
Benchmark global oil prices sank between 7% and 9% on Monday, their biggest fall in over two months. From Thursday's peak to today's trough, WTI fell as much as 12%. Yet the decline in Treasury yields has been very modest — the 10-year closed on Monday at 4.64%, only 7 bps off last week's peak above 4.71%.
The bond market is signaling it doesn't put much faith in the latest U.S.-Iran detente lasting, or even if it does, inflationary pressures are unlikely to cool much. It's the early innings, but the economy is moving into an era of structurally higher yields, certainly relative to the last decade. The 30-year yield is in its longest stretch above 5% since 2007. Businesses and households will have to adjust. Investors too.
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