Rates Spark: How about a 50bp hike? Now that would be quite the statement
The desk believes a 50 basis point hike could be a bold and appropriate move for the Federal Reserve, setting a precedent for a more aggressive approach under Chair Warsh. As highlighted in the recent analysis, while a hike of 25 basis points is expected, the market has largely priced in an increase, placing pressure on the Fed to match this expectation or risk losing credibility. Per the full note , should the Fed implement a 50 basis point hike, it would not only affirm its control over monetary policy but potentially redefine market dynamics surrounding forward guidance.
What the desk is arguing
The desk asserts that a 50bp hike by the Federal Reserve could serve as a strategic statement by Chair Warsh as he seeks to establish his policy stance. While the consensus appears to be leaning towards a 25bp move, the implications of a larger hike would resonate through financial markets and reinforce the Fed's commitment to combating inflation.
Key evidence from the note suggests that failing to act, especially when such a hike is nearly fully priced in, could lead to a perception of indecisiveness from the Fed. This disappointment could exacerbate tensions in the bond market, particularly as the Fed navigates the complexities of interest rate adjustments.
The alternative read would be a pause on hikes, which now seems unlikely given the current market conditions and the Fed's previous guidance, especially from Chair Warsh's Jackson Hole remarks, which hinted at a more proactive approach.
Where it sits in our coverage
Our consensus target for this pair is 1.075, with a range between 1.04 and 1.12. Participating firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective of a potential 50bp hike aligns with jpmorgan's more aggressive positioning, while deviating from the more cautious stance reflected by bofa. The desk's expectation of a pronounced rate adjustment suggests it is at the higher end of the prevailing consensus spread.
How other firms see it
Several institutions appear to support a more hawkish outlook, with jpmorgan aligned on the likelihood of significant rate hikes, contrasting against the more conservative expectations from firms such as bofa, which anticipates slower adjustments.
As this situation develops, watch the USD/JPY pair for potential volatility as market participants react to upcoming Fed decisions and guidance adjustments. The trajectory of the EUR/USD will also correlate closely with interest rate speculation, given the central banks' converging narratives regarding monetary policy.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01A 50bp hike could assert Fed control under Chair Warsh.
- 02Current market pricing leans towards a 25bp increase.
- 03Failure to hike risks undermining Fed credibility.
- 04The USD/JPY pair may reflect market sentiment on Fed actions.
Market implications
If the Fed raises rates by 50bp, expect immediate volatility in interest rate-sensitive assets and potential strengthening of the USD across major pairs. Watch the 1.075 level as a key pivot for currency trading sentiment post-decision.
Risks to this view
A lack of action from the Fed, or a confirmation of only a 25bp hike without further context, could lead to a significant sell-off in the USD and unravel the expectations built into the current market pricing.
Articles Rates Spark: How about a 50bp hike? Now that would be quite the statement Published 17:24 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Close your ears Mr President, but 50bp might be the right move, as it could be more fitting with how Chair Warsh might like to pursue policy. We're not calling for it, as we go for 25bp.
But, is Chair Warsh just going to deliver the market discount? Really? After all that 'we'll do things differently' talk?
This is why this meeting is so intriguing Padhraic Garvey, CFA , Michiel Tukker and Benjamin Schroeder A 50bp rate hike by the Federal Reserve could be the right move (Mr President), although we think it will be 25bp instead - the market discount We think a 25bp hike. But lets discuss So, how are we positioned ahead of the Fed decision? Basically, the Federal Reserve must hike, and if it doesn't, it has quite some explaining to do, as a hike is practically fully discounted.
The issue is just that. Chair Warsh would be delivering on the market discount, one that he, to a significant extent, manufactured through guidance (from his Jackson Hole speech). This is precisely the round and round that Chair Warsh voiced as quite sub-optimal: the circular from Fed guidance to the market discount to Fed delivery of that discount.
There are two alternatives. One is no change in rates, which is not impossible given that we're still getting our heads around Warsh. But still, quite unlikely, partly as it could really kill off the back end.
The other option is to hike by 50bp. Doing so would see the Fed take some degree of control of the situation, which may well be more preferable from Chair Warsh's perspective. Presumably, such a move would not be followed by forward guidance (as that's not what he likes), but it could still be "guided" as akin to a "one and done", or at the very least, getting ahead of the curve, through a chunky "insurance hike".
That's the reward. But the risk could be market instability. The back end should be comforted by this, as the Fed would be seen to be actively protecting it.
But it could just as easily freak out the back end, as it validates the 100bp rise seen in the 10yr yield in the past half year, and it engineers a follow-through sell-off. All things considered, this is the move that is more likely to tame the back end (if it can be tamed at this juncture). For clarity, we're going for 25bp.
See more here . And for our views on longer tenor rates, see more here . Term premium can keep building, bear steepening curves Rate markets continue to show volatility and higher longer rates suggest not everything is about near-term central bank expectations.
The term premium is doing its own thing and adds uncertainty to the rates outlook. Even if oil prices were to ease lower from here, other factors might keep the long end sticky at elevated levels. For one, the yield on a 30Y Japanese government bond is rising rapidly again.
Meanwhile, lower liquidity at such longer tenors in the euro swap space is adding to the volatility. US deficit concerns are also unlikely to fade. The question is then, who wants to jump in at these higher rates.
Exposures to long-duration bonds are typically a hedge against recession risk, but this doesn’t seem a focus for markets currently. Typically, the term premium can keep rising in favourable economic circumstances as growth and positive sentiment add upward pressure. Yet we cannot forget the flip side of this.
Booms are followed by busts. Timing is of course the issue here. We could be at the beginning of a cyclical upswing driven by AI as the driving engine, or we could be at peak global growth followed by a cooling from here onwards.
Plenty of arguments for both directions. For now, we think the upward pressure can sustain. For 2027 we are, however, more pessimistic, especially on the US economic outlook.
Wednesday’s events and market view The Fed will take the spotlight on Wednesday. By now, the market is pricing an over 90% probability of a hike, which would take the Fed funds target range to 3.75-4%. One thing market participants will watch is whether the dot plot pencils in more tightening by the end of this year.
Ahead of the Fed meeting there will be some notable data releases over the course of Wednesday, starting with the UK inflation numbers for August. In the eurozone we will get the industrial production data for July. Of further interest surrounding the debate about second-round inflation effects will be the European Central Bank’s release of its wage tracker.
Speakers scheduled for the day are Vujcic and Nagel from the ECB. Turning to the US, import/export prices can round off the inflation picture; retail sales are expected to have improved in August. We will also get the mortgage application numbers and the NAHB housing market index.
In primary markets, Germany taps two ultra-long bonds (€2.5bn). Rates Daily Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Authors Padhraic Garvey, CFA Regional Head of Research, Americas Padhraic Garvey is the Regional Head of Research, Americas. He's based in New York. His brief spans both developed and emerging markets and he specialises in global rates and macro relative… Michiel Tukker Senior UK & Eurozone Rates Strategist Michiel Tukker is a Senior UK & Eurozone Rates Strategist based in London.
Before ING, he worked as a quantitative economist for the Dutch central bank, at BlackRock in its Financial Markets… Benjamin Schroeder Senior Rates Strategist Benjamin Schroeder is a senior rates strategist at ING in Amsterdam. Before joining ING in 2016, he worked in fixed income research at Dresdner Kleinwort and Commerzbank in Frankfurt, Germany.… In this article We think a 25bp hike. But lets discuss Term premium can keep building, bear steepening curves Wednesday’s events and market view
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