(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. .
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The bet, which emerged after a spectacular jobs report on Jan. 10, stands in stark contrast to the consensus on Wall Street for at least one rate cut this year. That contrarian bet has held up even after a benign inflation report on Wednesday strengthened the Federal Reserve’s rate-cutting stance and caused yields in the U.S. Treasury market to retreat from multi-year highs.
According to a Bloomberg Intelligence analysis as of Friday’s close, based on options tied to the overnight secured funding rate, traders currently see about a 25% chance that the Federal Reserve’s next move will be to raise rates. by the end of the year. Those bets reached 30% before consumer price data. Until more than a week ago, an increase wasn’t even considered: 60% of options traders were betting on more cuts from the Federal Reserve and 40% on a pause.
As with so many things in the financial markets these days, it’s actually a bet on the policies of future President Donald Trump. And it hinges on the idea that tariffs and other policies imposed by the new administration will trigger a spike in inflation that will force the Federal Reserve to make an embarrassing U-turn.
Phil Suttle, a former New York Fed economist who now heads its eponymous advisory department, predicts the Fed will raise rates in September. “I have them uncut at all. And that’s not a mad dog opinion,” he said Friday on the Macro Hive podcast.
Suttle expects Trump, who takes office on Monday, to impose tariffs and restrict immigration, thereby driving up inflation. The United States is already starting to see wages rise again, he said.
For now, Suttle’s opinion remains extreme. Bond traders have fully priced in a quarter-point rate cut for this year and saw a roughly 50% chance of a second cut, compared with just one cut a week earlier. On Thursday, Federal Reserve Governor Christopher Waller said authorities could lower rates again in the first half of 2025 if inflation data remains favorable.
The comments sent US government bond yields lower. Early last week, the benchmark 10-year Treasury note hit a high of 4.81%, the highest level since late 2023. Longer-term yields have risen since the Federal Reserve began cutting yields. rates in September.