Washington politicians and policymakers can protest. But the verdict of the bond market is clear. The Federal Reserve is going to raise interest rates again. Soon.
My MoneyShow Chart of the Day compares the yield on the 2-Year Treasury Note (in blue) to the upper limit of the federal funds rate target range (in green). You can see that the former has been rising steadily since March, even as the latter has remained flat.
2-Year Treasury Yield (Blue) Vs. Federal Funds Rate
Target Range Upper Limit (Green)
Source: FRED
If you follow the bond market closely, then you know that yields on shorter-term securities are more sensitive to changes in Fed policy. So, comparing the relationship between 2-year yields and the federal funds rate gives you a pretty good indication of what market participants expect. When 2-year yields are significantly higher than the funds rate, it suggests traders are pricing in a higher chance of hikes.
The same “Get ready for a rate hike” message is coming from the CME FedWatch tool, by the way. The implied probability of a 25-basis point Fed hike at the meeting that concludes on Wednesday just spiked to 87% on Friday. It was running around 48% a month earlier.
Does all this GUARANTEE the Fed moves? No. It could try to “fight” the markets and stand pat this week.
But that would likely lead to an even-bigger move at the long end of the yield curve. Not to mention even more volatility in stocks. There’s a reason James Carville famously lamented the bond market’s ability to intimidate Washington policymakers and force their hand.
