(Bloomberg) — It’s a long shot at best, but one that has emerged among a group of die-hard bond traders — that the Federal Reserve’s next move on interest rates will be up, not down.
Most read by Bloomberg
The bet, which came after a Jan. 10 jobs report, stands in stark contrast to the consensus on Wall Street for at least one rate cut this year. That contrarian bet held even after a benign inflation report on Wednesday strengthened the Fed’s rate-cutting stance and caused U.S. Treasury yields to retreat from multi-year highs.
Based on options tied to the secured overnight funding rate, traders currently see about a 25% chance that the Fed’s next move will be to raise rates by the end of the year, according to a Bloomberg Intelligence analysis as of Friday. Those bets were as much as 30% ahead of consumer price data. Up until just over a week ago, the hike wasn’t even entertained — 60% of options traders were betting on more Fed cuts and 40% on a pause.
As with many things in the financial markets these days, it’s really a bet on the policies of President-elect Donald Trump. And that depends on the idea that tariffs and other policies imposed by the new administration will trigger a rebound in inflation that will force the Fed into an uncomfortable U-turn.
Phil Suttle, a former New York Federal Reserve economist who now runs the advisory shop of the same name, sees the Fed raising rates in September. “I have them so they don’t cut at all. And that’s not the look of a rabid dog,” he said Friday on the Macro Hive podcast.
Suttle expects Trump, who takes office on Monday, to push through tariffs and restrict immigration, which will raise inflation. Wages are already starting to rise again in the US, he said.
For now, Suttle’s position remains extreme. Bond traders have fully priced in a quarter-point rate cut for the year and see a roughly 50% chance of a second cut, compared with just one a week earlier. On Thursday, Fed Governor Christopher Waller said policymakers could cut rates again in the first half of 2025 if inflation data remains favorable.
The remarks pushed U.S. Treasury yields lower. Earlier last week, the benchmark 10-year Treasury note hit a peak of 4.81%, the most since late 2023. Long-term yields have been rising since the Fed began cutting rates in September.
“If you were to see significant inflation surprises in the coming months, you could have the market flirting with the potential for rate hikes this year,” said Roger Hallam, global head of rates at Vanguard.
After a policy meeting in December, Chairman Jerome Powell told reporters that the central bank was unwilling to settle for inflation above its 2% target. When asked if that meant he couldn’t rule out a rate hike in 2025, he said: “You don’t control things completely or outside of this – in this world.” Although he added that an increase “does not seem a likely outcome.”
Although the bar for rate hikes is high, the Fed has been quick to reverse course in the past. In 1998, officials cut interest rates three times quickly to avert a financial crisis triggered by a Russian debt default and the near-collapse of hedge fund Long Term Capital Management. The Fed then began raising rates in June 1999 to curb inflationary pressures.
“What the market would need to push prices up significantly is for inflation to really pick up again – with, say, core consumer prices moving to the mid-3% level,” said Tim Magnusson, chief investment officer at hedge fund Garda Capital Partners. “I think the Fed is very comfortable sitting on its hands for a while.”
Benson Durham, head of global asset allocation at Piper Sandler and a former Fed economist, sees just under a 10% probability factored into money market options of at least one rate hike this year, once the contracts adjust to the term premium, the extra yield considered that investors require to buy long-term securities, an analysis the Fed has also long used.
“Overall, the market appears to be fairly balanced in terms of current upside or downside risks,” he said.
What to watch
Economic data:
January 21: Philadelphia Fed non-production activities
January 22: MBA mortgage applications; Leading index
January 23: Initial claims for unemployment benefits; Kansas City Fed Manufacturing Activity
January 24: S&P Global PMI for US manufacturing (preliminary); S&P Global US Services PMI (Preliminary); S&P Global US Composite PMI (Preliminary); University of Michigan Feeling (Final); sale of existing houses; Official business of the Kansas City Fed
Fed calendar:
Auction calendar:
January 21: bills for 13, 26, 52 weeks; 42-day CMB
January 22: bills for 17 weeks; 33-day CMB; 20-year bond reopening
