Expectations for a rate hike from the Fed have been steadily increasing in recent weeks, with markets now pricing in a 92.3% chance for a hike for at least 25 basis points at the central bank's policy announcement on Wednesday, according to CME FedWatch, up from 59.4% a week ago and 33.1% a month ago.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 33.5 basis points.
A decision to hike rates could leave new Chairman Kevin Warsh in a tight spot, as President Donald Trump picked Warsh with the explicit expectation that he would cut interest rates.
The two-year U.S. Treasury yield US2YT=RR gained 3.3 basis points to 4.667% after rising to 4.688%, its highest since July 5, 2024.
Markets are now pricing in nearly 100 basis points of hikes over the next 12 months, and Bank of America U.S. economist Aditya Bhave said in a note that he continues to expect 75 basis points worth of hikes from the Fed this year, and that by moving quickly, the central bank will have "a better chance of quelling inflation and keeping a lid on long-end rates."
Morgan Stanley's Chief U.S. Economist Michael Gapen said he now expects two hikes of 25 basis points from the Fed this year, in September and December.
In recent days, a growing number of brokerages have said they expect the Fed to raise rates this week following stronger-than-expected inflation readings raised doubts that price pressures would ease in the absence further tightening.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.426% after closing at 2.418% on Monday.
The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.386%, indicating the market sees inflation averaging about 2.4% a year for the next decade.
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