Will they hike ’em today? Probably not. But the sight of a central bank raising interest rates is no longer unusual. Australia has been hiking the price of money recently and South Korea is reportedly set to begin its exit strategy. The Fed isn’t likely to join them today. The formal yeah or nay arrives this afternoon, when the FOMC releases a statement. But the aura of tightening hangs in the air.
But the aura isn’t moving money at the moment. The futures market isn’t expecting any change. Fed funds contracts are currently priced for the status quo for the near term. The futures markets anticipates that rates will be higher in the second half of this year, but not by much.
But some intriguing clues are bubbling, according to Bloomberg News:
Money market interest rates at five-month highs show the Federal Reserve is laying the groundwork to siphon a record $1 trillion in excess cash from the banking system and sending a bearish signal on Treasuries.
Overnight federal funds rates rose to the highest since September and the cost to dealers to borrow and lend U.S. securities for one day more than doubled in the past month. Three-month Treasury bill rates rose last week to the highest since August.
The rise is a sign traders are preparing for tighter monetary policy as stimulus measures end. In the three months before the Fed started raising borrowing costs in June 2004, 10- year Treasury yields rose about 0.75 percentage point as bond prices fell. While higher rates mean increased borrowing costs for President Barack Obama, they also show growing confidence that the economic recovery is gaining traction.
“The Fed is definitely getting its ducks in a row,” said Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services Ltd., which oversees $7.5 billion. “There is no doubt that in the early phases of the Fed’s plan, the Treasury market could suffer.”
But for the moment the ducks are likely to stand pat. The only change will be the rhetoric in the FOMC statement, opines Greg Robb of MarketWatch.com. The “extended period” phrase in policy pronouncements of late that implied low rates as far as they eye could see, including this FOMC statement issued on January 27, may be retired, he writes. “Altering the wording would be a clear signal that the Fed is more sanguine about the economic outlook and believes ultra-low rates are no longer necessary — and financial markets would react accordingly,” Robb forecasts.